Explain and Learn, The Strategies of Capabilities in Production Management!
What is Capacity Planning? The production system design planning considers input requirements, conversion process, and output. The concept of the study – The Strategies of Capabilities in Production Management. Capacity Planning defines, Strategic Capacity Planning, and Explaining of Capacity strategies. After considering the forecast and long-term planning organization should undertake capacity planning. Also learn, The Strategies of Capabilities in Production Management!
Capacity is defined as the ability to achieve, store or produce. For an organization, capacity would be the ability of a given system to produce output within the specific time period. In operations, management capacity is referred as an amount of the input resources available to produce relative output over the period of time.
It is a process of governing the production capacity obligatory by a manufacturing unit to meet out their varying demand for their products. It facilitates the organization to achieve their production level during the time of demand. It is the level of input that is obtainable to make the needed product in a particular period of time. It helps the management to take better management decision for optimum utilization of the resource.
In general, terms capacity is referred to as maximum production capacity, which can be attained within a normal working schedule. Capacity planning is essential to be determining optimum utilization of resource and plays an important role decision-making process, for example, the extension of existing operations, modification to product lines, starting new products, etc.
Understand the Strategic Capacity Planning: A technique used to identify and measure the overall capacity of production is referred to as strategic capacity planning. Strategic capacity planning is utilized for the capital-intensive resource like the plant, machinery, labor, etc.
Strategic capacity planning is essential as it helps the organization in meeting the future requirements of the organization. Planning ensures that operating cost is maintained at a minimum possible level without affecting the quality. It ensures the organization remain competitive and can achieve the long-term growth plan.
Strategies of Capabilities:
The Capacity strategies can explain into two types:
The short-term response, and.
Long-term response.
Short-term strategies:
In short-term periods of up to one year, fundamental capacity is fixed. Major facilities are seldom opened or closed on a regular monthly or yearly basis. Many short-term adjustments for increasing or decreasing capacity are possible, however. Which adjustment to make depend on whether the conversion process is labor or capital intensive and whether the product is one that can be stored in inventory.
Capital intensive processes rely heavily on physical facilities, plant, and equipment. Short-term capacity can be modified by operating these facilities more or less intensively than normal. The cost of setting up, changing over and maintaining facilities, procuring raw materials and managing inventory, and scheduling can all be modified by such capacity changes. In labor-intensive processes, the short term capacity can be changed by laying off or hiring people or having employees overtime or be idle. These alternatives expensive, though since hiring costs, severance pay, or premium wages may have to be paid, the scarce human skills may be lost permanently.
Strategies for changing capacity also depend upon long the product can be stored in inventory. For products that are perishable (raw food) or subject to radical style changes, storing in inventory may not feasible. This is also true for many service organizations offering such products as insurance protection, emergency operations (fire, police etc,) and taxi and barber services. Instead of storing outputs in inventory, inputs can be expanded or shrunk temporarily in anticipation of demand.
Long-term Responses:
Capacity expansion strategies- capacity expansion adds capacity, within the industry, to further the objectives of the firm to improve the competitive position of the organization. It focuses on the growth of the Organization by enabling it to increase the flow of its products in the industry. Capacity expansion is a very significant decision; the strategic issue is how to add capacity while avoiding industry overcapacity. Overbuilding of capacity has plagued many industries e.g. paper, aluminum and many chemical businesses. The accountants’ or financial procedure for deciding on capacity expansion is straightforward.
However, two types of expectations are crucial:
Those about future demand, and.
Those about competitors behavior.
With known future demand, organizations will compete to get the capacity on stream to supply that demand, and perhaps preempt such action from others.
Horizontal and vertical integration: Horizontal and vertical integration add capacity, within the industry, to further the objectives of the firm to improve the competitive position of the organization.
Horizontal Integration: Horizontal integration is the growth of a company at the same stage of the value chain. Horizontal integration consists of procuring (related companies, products or processes) the company could start the related business within the firm, which would be an example of internal concentric diversification.
Vertical Integration: Vertical integration is the combination of economic processes within the confines of a single organization. It reflects the decision the decision of the firm to utilize internal transaction rather than the market transaction to accomplish its economic purpose. It is expressed by the acquisition of a company either further down the supply chain, or further up the supply chain, or both.
Backward Integration: In case of backward integration, it is critical that the volumes of purchases of the organization are large enough to support an in-house supplying unit, If the volume of throughputs is sufficient to set up capacities with economies of scale, an organization will reap benefits in production, sales purchasing, and other areas.
Takeover or Acquisitions: Takeover or acquisition is a popular strategic alternative to accelerate growth. Major companies which have been taken over the post-liberalization period include Shaw Wallace, Ashok Leyland, Dunlop, etc. Acquisition can either be for value creation or value capture.
Financial reporting is the financial result of an organization that releases it to the public. The Concept of the study Explains – Financial Reporting and their topics Definition, Objectives, and the Importance. This reporting is a key function of the controller, who may assist by the investor relations officer if an organization is publicly held. “Financial statements or financial reports” is a formal record of the financial activities and position of a business, person, or other entity.
Explain and Learn, Financial Reporting: Definition, Objectives, and Importance.
A firm communicates to the users through financial statements and reports. The financial statements contain summarized information on the firm’s financial affairs, organized systematically.
The preparation of the financial statements is the responsibility of top management. They should be prepared very carefully and contain as much information as possible. Financial Reporting: Definition, Objectives of Financial Reporting, and the Importance of Financial Reporting; Two basis financial statements prepared for external reporting to owners, investors, and creditors are:
Balance sheet or statement of financial position:
The balance sheet contains information about the resources and obligations of a business entity and about its owners’ interests in the business at a particular point in time. In accounting terminology, the balance sheet communicates information about assets, liabilities and owner’s equity for a business firm as on a specific date. It provides a snapshot of the financial position of the firm at the close of the firm’s accounting period.
Profit and loss account or income statement:
The profit and loss account presents the summary of revenues, expenses and net income (or net loss) of a firm for some time. Net income is the amount by which the revenues earned during a period exceed the expenses incurred during that period.
More information requires planning and controlling and therefore the financial accounting information presents in different statements and reports in such a way as to serve the internal needs of management. Financial statements prepared from the accounting records maintained by the firm.
The following Financial reporting typically encompasses below:
Financial statements, which include the income statement, balance sheet, and statement of cash flows
Accompanying footnote disclosures, which include more detail on certain topics, as prescribed by the relevant accounting framework
Any financial information that the company chooses to post about itself on its website
Annual reports issued to shareholders
Any prospectus issued to potential investors concerning the issuance of securities by the organization
If a business is publicly held, financial reporting also includes the following:
The quarterly Form 10-Q and annual Form 10-K, which are filed with the Securities and Exchange Commission
The annual report issued to shareholders, which could a strip-down version that calls a wrap report
Press releases containing financial information about the company
Earnings calls, during which management discusses the company’s financial results and other matters.
The objectives of Financial Reporting:
The main objective of financial reporting is to provide financial information to the current capital provides to make decisions. This information might also be useful to users who are not capital providers. The general purpose financial reporting develops superior reporting standards to help in the efficient functioning of economies and the efficient allocation of resources in capital markets.
General-purpose financial reporting focuses on an extensive range of user’s needs that cannot obtain financial information needed from the entity. It should be broad enough to comprehend information for various users. Therefore, the financial report is where they depend on to acquire information. Diverse users may require different information which might go beyond the scope of general purpose financial reporting.
The financial reports are prepared from the entity’s perspective (deemed to have substance on its own, spate from that of its owners), instead of the entity’s capital providers. An entity attains economic resources (its assets) from capital providers in exchange for claims to those resources (its liabilities and equity). Capital providers include;
Equity investors:
Equity investors normally invest economic resources in an entity expecting to receive a return on, as well as a return of, the resources invested in. Hence, equity investors concern with the amount, timing, uncertainty of an entity’s future cash flows and the entity’s competence in generating those cash flows which affects the prices of their equity interests. Furthermore, they concern with the performance of directors and management of the entity in discharging their responsibility to make efficient and profitable use of the assets invested.
Lenders:
Lenders usually expect to receive a return in the form of interest, repayments of borrowings, and increases in the prices of debt securities. The Lenders have similar interests as equity investors.
Other creditors:
Other creditors provide resources because of their relationship with the entity, instead of a capital provider; no primary relationship.
Employee – salary or compensation
Suppliers – extended credit
Customer – prepay for goods and services
Managers – responsible for preparing financial reports
Capital providers make decisions through useful information provided in financial reporting by the particular entity. Financial reporting usefulness in assessing cash flow prospects depends on the entity’s current cash resources and the ability to generate sufficient cash to reimburse its capital providers. Besides, financial reporting usefulness in assessing stewardship includes the management’s responsibilities to protect the entity’s economic resources (assets) from unfavorable effects.
Management is also liable for safeguarding the assets of the entity which conforms to the laws, regulations and contractual provisions; thus, the importance of management’s performance in the decision usefulness. The general purpose of financial reporting limits to the information that does not reflect pertinent information from other sources that should consider by the users.
Financial reporting information base on estimates, judgments, and models of the financial effects on an entity of transactions and other events in which, is only ideal for preparers and standard setters to strive. Achieving the framework’s vision of ideal financial reporting to the fullest will be difficult in the short term because of technical infeasibility and cost constraints.
Financial reporting should include information about: the economic resources of an entity (assets), the claims of the entity are (liabilities and equity), the effects of transaction and any events or circumstances that can affect the entity’s resources and claims and provide useful information about the ability of entity to generate its cash flow and how well the entity meets its management responsibilities.
The usefulness of financial reporting to the users:
Provide useful information about the amount, timing, and uncertainty of future cash flow
Identify the entity’s financial strengths and weaknesses (especially for capital providers)
Indicate the potential of the entity’s cash flow for its economic resources and claims
Identify the effectiveness of the entity’s management responsibilities
Assess the availabilities of the entity’s nature and quantity of the resources for the use in its operation
Estimate the values of the entity.
The quantitative measures and other information regarding the changes in entity’s economic resources and claims in the financial report can help the users to assess the amount, timing, and uncertainty of its cash flow; and indicate the effectiveness of management responsibilities.
Furthermore,
The entity must provide a positive return on its economic resources to generate net cash inflows, and return the earning to its investors. Other information like the variability of returns, past financial performance, and management’s ability can use to assess the entity’s future financial performance.
The information regarding the accrual accounting in financial reporting can better provide the users to assess the entity’s past financial performance and prospects in generating net cash inflows without obtaining additional capital from its investors.
The entity’s cash flow performance in financial reporting assists the investors to understand the entity’s business model and operation by assessing how the entity obtains and spends cash. Information about its borrowing, repayment of borrowing, cash dividends and other distribution to investors, as well as the factors of entity’s liquidity and solvency, can also assist the investors to determine the entity’s cash flow accounting.
Besides,
Information about the changes in the entity’s resources and claims not resulting from financial performance may assist the investors to differentiate the changes that are results of the entity’s financial performance and those that are not.
The information of management explanation should include in financial reporting to assist users for a better understanding of management decisions in any events and circumstances that have affected or may affect the entity’s financial performance. It is because the internal parties know about the entity’s performance than the external users.
Financial Reporting: Definition, Objectives, and Importance! Image credit from #Pixabay.
Importance of Financial Reporting:
The importance of financial reporting cannot overemphasize. It is required by every stakeholder for multiple reasons & purposes. The following points highlight why financial reporting framework is important:
It helps an organization comply with various statues and regulatory requirements. The organizations are required to file financial statements with ROC, Government Agencies. In the case of listed companies, quarterly as well as annual results are required to file to stock exchanges and publish.
It facilitates the statutory audit. The Statutory auditors are required to audit the financial statements of an organization to express their opinion.
Financial Reports form the backbone for financial planning, analysis, benchmarking and decision making. These uses for the above purposes by various stakeholders.
Financial reporting helps organizations to raise capital both domestic as well as overseas.
Based on financials, the public in large can analyze the performance of the organization as well as its management.
Forbidding, labor contracts, government supplies, etc., organizations require to furnish their financial reports & statements.
The importance of financial statements lies in their utility to satisfy the varied interest of different categories of parties such as management, creditors, public, etc.
In Management:
An increase in the size and complexities of factors affecting the business operations necessitate a scientific and analytical approach in the management of modern business enterprises. The management team requires up to date, accurate and systematic financial information for the purposes.
Financial statements help the management to understand the position, progress, and prospects of business vis-a-vis the industry. By providing the management with the causes of business results, they enable them to formulate appropriate policies and courses of action for the future.
The management communicates only through these financial statements, their performance to various parties and justifies their activities and thereby their existence. A comparative analysis of financial statements reveals the trend in the progress and position of the enterprise; and, enables the management to make suitable changes in the policies to avert unfavorable situations.
In the Shareholders:
Management separate from ownership in the case of companies. Shareholders cannot, directly, take part in the day-to-day activities of the business. However, the results of these activities should be reported to shareholders at the annual general body meeting in the form of financial statements.
These statements enable the shareholders to know about the efficiency and effectiveness of the management; and, also the earning capacity and financial strength of the company.
By analyzing the financial statements, the prospective shareholders could ascertain the profit earning capacity, present position, and prospects of the company; and, decide about making their investments in this company. Published financial statements are the main source of information for prospective investors.
In Lenders/Creditors:
The financial statements serve as a useful guide for the present and future suppliers and probable lenders of a company. It is through a critical examination of the financial statements; that these groups can come to know about the liquidity, profitability and long-term solvency position of a company. This would help them to decide about their future course of action.
In Labor:
Workers are entitled to bonus depending upon the size of profit as disclosed by the audited profit and loss account. Thus, P & L a/c becomes greatly important to the workers. In wages negotiations also, the size of profits and profitability achieved are greatly relevant.
In the Public:
Business is a social entity. Various groups of society, though directly not connected with the business, are interested in knowing the position, progress, and prospects of a business enterprise. They are financial analysts, lawyers, trade associations, trade unions, the financial press, research scholars, and teachers, etc. It is only through these published financial statements; these people can analyze, judge and comment on the business enterprise.
In the National Economy:
The rise and growth of the corporate sector, to a great extent, influence the economic progress of a country. Unscrupulous and fraudulent corporate management shatter the confidence of the general public in joint-stock companies; which is essential for economic progress and retard the economic growth of the country.
Financial Statements come to the rescue of the general public by providing information by which they can examine; and, assess the real worth of the company and avoid being cheated by unscrupulous persons. The law endeavors to raise the level of business morality by compelling the companies to prepare financial statements in a clear; and, systematic form and disclose material information.
This has increased the confidence of the public in companies. Financial statements are also essential for the various regulatory bodies such as tax authorities, Registrar of companies, etc. They can judge whether the regulations are being strictly followed; and, also whether the regulations are producing the desired effect or not, by evaluating the financial statements. Read and share the given article (Financial Reporting: Definition, Objectives, and Importance) in Hindi.
Market-Based Management is found on the principles that cause societies to become wealthy instead of mired in poverty. The Concept of the study Explains – Market-Based Management: Meaning of Market-Based Management, Principles of Market-Based Management, Ten-Points, and Dimensions of Market-Based Management. It seems the business as a small society with exceptional features requiring variation of the education drawn from society at large. Through this variation, an organization could build an MBM structure and ever-evolving mental models. Also learned, Market-Based Management: Meaning, Principles, and Dimensions!
Explain and Learn, Market-Based Management: Meaning, Principles, and Dimensions!
Market-Based Management is a holistic approach to an organization that incorporates theory and practice and organizes businesses to deal effectively with the challenges of change and growth. It also draws on the training learned from the failures and successes of individuals to attain prosperity, peace and organizational progress. Thus, it involves the study of the history of economics, politics, societies, cultures, governments, businesses, conflicts, science, non-profits and technology.
Market-Based Management is the exceptional management tactic developed and executed by Koch Industries, Inc. It is a company philosophy that is embedded in the science of human action and functional through five dimensions: Vision, Knowledge Processes, Virtues and Talents, Decision Rights and Incentives. Koch Industries’ MBM Guiding Principles articulate the rules of just conduct and describe the main values which direct the day by day business activities.
Meaning of Market-Based Management:
MBM is an approach of philosophy which centers on using the tacit knowledge of workers to the benefit of the business. It stands on creating a situation where workers can feel secure to speak their opinions and questionable decision making because of the values and the culture permits it. Market-Based Management was based on the fact that capital, ideas, and talent are permissible to flow freely and is situated where it is most likely to produce wealth and innovation. This is unusual from the traditional company model where decision-making, knowledge, and resources are controlled centrally by a top management team.
All gathered knowledge from the external settings is shared inside the business and utilized by workers involved in developing new services and products. Businesses need to decentralize decision-making in areas where the knowledge is situated rather than trying to move knowledge up the business for top management to make decisions with insufficient knowledge. Freedom of speech and action are important elements of a market economy, just as workers require experiencing the liberty to question and communicating improvements in their work environment
The Principles of Market-Based Management:
The ten guiding principles are the solution to the internal culture of a business: integrity – carry out all affairs lawfully and with great integrity, value creation – produce real, long-term value by moving on economic freedom. Recognize, develop, and apply Market-Based Management to get better outcomes and remove waste, compliance. Striving for 100% compliance on the part of employees, principled entrepreneurship. Show the sense of discipline, urgency, work ethic, judgment, accountability, economic and critical thinking skills, initiative, and the risk-taking attitude essential to create the greatest input to economic freedom, knowledge.
Look for and use the most excellent knowledge in decisions making and proactively share the knowledge while accepting challenge, measure outcomes whenever practical, customer focus. Understand and build up associations with those who can most efficiently advance economic freedom, change. Embrace change; foresee what could be, test the status quo, and make inspired destruction, respect. Treat others with respect, dignity, honesty, and compassion. Be glad about the value of diversity.
Support and observe collaboration, humility – practice intellectual honesty and modesty. Regularly seek to recognize and profitably deal with actuality to produce value and attain personal development, and fulfillment. Produce outcomes that produce value to understand the complete potential and find accomplishment in the work. When put into actions all these principles join to create a positive culture and a dynamic.
There are ten-points principles of MBM:
Integrity: Conduct all affairs with integrity, for which courage is the foundation. Honor donor intent.
Compliance: Strive for 10,000% compliance with all laws and regulations, which requires 100% of employees fully complying 100% of the time. Stop, think, and ask.
Value creation: Contribute to societal well-being by advancing the ideas, values, policies, and practices of free societies. Understand, develop, and apply MBM to achieve superior results by making better decisions, eliminating waste, optimizing, and innovating.
Principled entrepreneurship: Apply the judgment, responsibility, initiative, economic and critical thinking skills, and sense of urgency necessary to generate the greatest contribution, consistent with the organization’s risk philosophy.
Customer focus: Discover, collaborate, and partner with those who can most effectively advance free societies.
Knowledge: Seek and use the best knowledge and proactively share your knowledge while embracing a challenging process. Develop measures that lead to more effective action.
Change: Anticipate and embrace change. Envision what could be, challenge the status quo, and drive creative destruction through experimental discovery.
Humility: Exemplify humility and intellectual honesty. Constantly seek to understand and constructively deal with reality to create value and achieve personal improvement. Hold yourself and others accountable.
Respect: Treat others with honesty, dignity, respect, and sensitivity. Appreciate the value of diversity, including, but not limited to, diversity in experiences, perspectives, knowledge, and ideas. Encourage and practice teamwork.
Fulfillment: Find fulfillment and meaning in your work by fully developing your capabilities to produce results that create the greatest value.
The guiding principles of MBM are clearly linked to the tenets of the Austrian school of economics. The principles of integrity and respect tie into Hayek’s “rules of conduct” notion and the principle of knowledge can be paralleled to Hayek’s 1937 and 1945 essays on knowledge. Under the broad notion of competition, the principles of entrepreneurship, value creation, and customer focus follow the economic theories of Schumpeter, Hayek, and Kirzner. Let us review the five dimensions of MBM.
Dimensions of Market-Based Management:
A business’s culture is the basis of victory, and a strong, flourishing workplace is a requirement of being able to explain problems using the five dimensions of Market-Based Management. By screening businesses throughout five special dimensions, problems are more simply detected and solved.
According to the Charles Koch Institute, there are five dimensions to MBM:
Vision – Determining where and how the organization can create the greatest long-term value.
Virtue and Talents – Helping ensure that people with the right values, skills, and capabilities are hired, retained, and developed.
Knowledge Processes – Creating, acquiring, sharing, and applying relevant knowledge, and measuring and tracking profitability.
Decision Rights – Ensuring the right people are in the right roles with the right authority to make decisions and holding them accountable.
Incentives – Rewarding people according to the value they create for the organization.
They are – Vision – determining how and where the business can produce the most long-term worth. The development of a successful vision needs recognizing how a business can make better value for the client and most fully benefit from it. The procedure begins with a practical evaluation of the business’s core potential (new, improved or existing) and a preliminary determination of the chances for which these competencies can create the most worth. This preliminary determination must be established through the improvement of a point of view concerning what is going to occur in the industries where the business consider these chances exist.
To be a truly successful business, one that stands and excels the test of time, virtue, as well as talent, must be highlighted. Virtue and talents help to ensure that individuals are with the correct skills, values, and capabilities are employed, retained, and developed. Businesses applying market-based management reward workers according to their virtue and their inputs.
Businesses struggle to find individuals who can produce the most value through a variety of experience, perspectives, knowledge, and abilities. Diversity within a business is also significant to assist to improve understanding and relating to its clients and communities in this diverse world. The skill to create genuine value depends on an ethical, entrepreneurial culture in which the workers are passionate about finding.
Although workers are chosen and kept on the basis of their beliefs and values, they must also have the required talent to produce outcomes. Virtue without the needed talent does not generate worth. But talent not including virtue is dangerous and can put the business and other workers at risk. Workers with inadequate virtue have done far more harm to businesses than those with inadequate talent.
Market economies are flourishing, in large part, because they are better at creating helpful knowledge. Knowledge processes are market economies that make them mainly because they are well-equipped to produce useful knowledge. Acquiring, creating, sharing, and applying appropriate knowledge, and tracking and measuring profitability. The main methods of this knowledge creation are market signs from trade to prices, loss, and profit to and free speech.
Businesses are most wealthy when knowledge is abundant, available, important, cheap and growing. Such situations are most fully brought about by trade. Knowledge increases success by indicating and guiding resources to most valued uses. Besides allowing producers to build goods that create better value for customers, new knowledge also assist producers to do so with the smaller amount of resources. The detection and application of knowledge directly to the enhanced use, consumption and of resources.
Within a business, knowledge is necessary for creating better value for its clients and the business. A knowledge procedure is a way by which businesses develop, replace, apply and share knowledge to create value. To be successful in an uncertain future, a business must draw on the dispersed knowledge among its workers. It must also give them the confidence to find out new means to create value. Workers must innovate, not just in technology, but in all features and at all levels of the company.
Decision rights are ensuring the correct individuals are in the right roles with the exact power to make decisions and holding them responsible. Decision rights should reproduce a worker’s established relative advantages. A worker has a relative advantage among a group of workers when he/she can carry out an activity more efficiently at a lesser opportunity cost than others. Decision rights constitute a worker’s liberty to act separately in carrying out the tasks of a given role.
They normally take the form of limits for diverse types of capital expenditures, operating expenses and contractual commitments. The right to make some decisions, but not others, is supported on the degree to which a worker has established the skill to achieve outcomes in diverse areas. Decisions should be taken by workers with the best knowledge, taking the comparative advantage into consideration.
Finally, incentives – gratifying people according to the value they generate for the business. These dimensions each offer a lens through which to be aware of and solve multifaceted obstacles that businesses face. For example, Koch industry used incentives to try to align the interests of every worker with the interests of the business.
This means striving to pay workers a part of the value created. Profit is an influential incentive that motivates entrepreneurs to be aware and take risks to foresee and satisfy client demands. Finding less costly ways to make existing goods and developing new and improved ones is not only painful for the discovering entrepreneur, but it is also advantageous for business.
However, there is the sixth dimension which is the brute physical force. The brute physical force dimension follows this basic pattern, first at the individual level; it is helpful to pump iron daily. At the organizational level, it is beneficial to strive to have employees whose standard shirt-collar size is in the low 20s, at least; and finally, at the societal level, wealth is usually increased.
In order to completely capture the influence of market-based management, a business must not only keep away from fruitless tendencies but frequently strive to develop its capability to internalize and apply appropriate mental models. This needs the most complex and painful of all changes. Achieving such a change entails a prolonged and focused effort to build up new habits of the idea based on these mental models. Achievement in relating new mental models comes only after frequent practice.
Meaning of Negotiable Instrument: A negotiable instrument is a specialized type of “contract” for the payment of money that is unconditional and capable of transfer by negotiation. The Concept of the study Explains – Negotiable Instruments: Types of Negotiable Instruments, Classification of Negotiable Instruments, Importance of Negotiable Instruments. Common examples include cheques, banknotes (paper money), and commercial paper. Also learned, Negotiable Instruments: Types, Classification, Importance!
Explain and Learn, Negotiable Instruments: Types, Classification, Importance!
A promissory note: is a Written promise by the maker to pay money to the payee. the most common type of promissory note is a bank note, Which is defined as a promissory note made by a bank and payable to bearer on demand. Through promissory note a person i.e. maker (drawer) promise to pay the payee a specific amount on a specified date Without any condition. “o the important points in a promissory note are 1) it is unconditional order 2) a specific amount 3) payable to the order of a person or on demand.
A bill of exchange: is a Written order by the drawer to the drawee to pay money to the payee. The most common type of bill of exchange is the cheque, which is defined as a bill of exchange drawn on a banker and payable on demand. &ills of exchange are used primarily in international trade and are written orders by one person to his bank to pay the bearer a specific sum on a specific date sometime in the future.
A cheque: is an unconditional order in writing drawn upon a specified banker signed by the drawer, directing to the banker to pay on demand a certain sum of money to or to the order of a person named therein or to the bearer.
#Types of Negotiable Instruments:
Parties to various types of Negotiable Instruments:
Drawer or Drawee:
The maker of a bill of exchange or cheque is called the “drawer”; the person thereby directed to pay is called the “Drawee”.
Drawee in case of need:
When in the bill or in any endorsement thereon the name of any person is given in addition to the Drawee to be resorted to in case of need such person is called a “drawee in case of need”.
Acceptor:
After the drawee of a bill has signed his assent upon the bill, or, if there are more parts thereof than one, upon one of such parts, and delivered the same, or given notice of such signing to the holder or to some person on this behalf, he is called the “acceptor”.
The acceptor for the honor:
When a bill of exchange has been noted or protested for non-acceptance or for better security, and any person accepts is supra protest for the honor of the drawer or of any one of the endorsers, such person is called an “acceptor for honor”.
Payee:
The person named in the instrument, to whom or to whose order the money is by the instrument directed to be paid, is called the “payee”.
Holder:
The “holder” of a promissory note, bill of exchange or cheque means any person entitled in his own name to the possession thereof and to receive or recover the amount due thereon from the parties thereto. Where the note, bill or cheque is lost or destroyed, its holder is the person so entitled at the time of such loss or destruction.
Holder in due course:
“Holder in due course” means any person who for consideration became the possessor of a promissory note, bill of exchange or cheque if payable to bearer, or the payee or endorse thereof, if (payable to order) before the amount mentioned in it became payable, and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title.
Endorsement:
When the marker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, one the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as a negotiable instrument, he is said to endorse the same, and is called the “endorser”.
Capacity to make, etc., promissory notes, etc.: Every person capable of contracting, according to the law to which he is subject, may bind himself and be bound by the making, drawing, acceptance, endorsement, delivery and negotiation of a promissory note, bill of exchange or cheque.
Minor:
A minor may draw, endorse, deliver and negotiate such instruments so as to bind all parties except himself. Nothing herein contained shall be deemed to empower a corporation to make, endorse or accept such instruments except in cases in which, under the law for the time being in force, they are so empowered.
Agency:
Every person capable of binding himself or of being bound, as mentioned in section 26, may so bind himself or be bound by a duly authorized agent acting in his name. A general authority to transact business and to receive and discharge debts does not confer upon an agent the power of accepting or endorsing bills of exchange so as to bind his principal.
#Classification of Negotiable Instruments:
The Following Classification of Negotiable Instruments are:
Inland Instrument:
A promissory note, bill of exchange or cheque which is 1) both drawn or made in India and made payable in India, or 2) drawn upon any person resident in India, is deemed to be an inland instrument. A bill of exchange drawn upon a resident in India is an inland bill irrespective of the place where it was drawn.
Foreign Instrument:
An instrument, which is not an inland instrument, is deemed to be a foreign instrument. Foreign bills must be protested for dishonor if such protest is required by the law of the place where they are drawn. But protest in case of inland bills is optional.
Instruments payable on demand:
A cheque is always payable on demand and it cannot be expressed to be payable otherwise than on demand. A promissory note or bill of exchange is payable on demand:
When no time for payment is specified in it.
When it is expressed to be payable ‘on demand’, or ‘at sight’ or ‘on presentment’. The words ‘on demand’ is usually in a promissory note, the words ‘at sight’ are in a bill of exchange.
Ambiguous Instrument:
When an instrument owing to its faulty drafting may be interpreted either as a promissory note or a bill of exchange, it is called an ambiguous instrument. Its holder has to elect once for all whether he wants to treat it an as a promissory note or a bill of exchange. Once he does so he must abide by his election.
Forged Instrument:
An instrument is a forged when it is drawn, made or alternated in writing to prejudice another man’s rights. The most common form of forgery is signing another person’s signature, signing the name of the fictitious or none existing person. Fraudulently writing the name of an existing person is also the forgery.
Forgery is a nullity and, therefore, it passes no title. No holder of a forged instrument acquires any right on the instruments. Even a holder in due course gets no title if he comes into the possession of a forged instrument. A person has to pay money on a forged instrument by mistake, can recover it from the person to whom he has paid for it.
Bearer And Order Instruments:
An instrument is a bearer instrument when the amount payable thereon is payable to the bearer and him as a holder and in lawful possession, thereof is entitled to enforce payment due on it.
Negotiable Instrument is a certain type of document, which transfers the money. It makes easy to carry money from one place to another place. So, it is very important for the transfer of money in the business sector.
The following points can grasp as the importance of a Negotiable Instrument.
Negotiable Instrument is an easier means of transfer of money.
It is easy to delivery from one place to another place.
It helps to flourish in the business sector.
It creates the right of property.
It has the easy negotiability and somewhere it provides the security.
It makes the fast transaction of money.
It makes the security of money as well as personal security in course of the transaction of money.
Negotiable Instrument is an easier way to transfer money from one place to another place. It provides a safe way to deliver the money. It has an important role to develop the way of money transaction as well as the business realm.
A Promissory Note is an instrument in writing, except government note or bank currency, containing unconditional undertaking signed by the Maker to pay a certain sum of money only to, or to the order of or to the bearer or to a certain person related to the instrument. Section 2(f) of Negotiable Instrument Act, 2034 The person, who makes the promissory note or promises, is called a ‘Maker’ and he has to sign that document as a debtor.
The person to whom payment is to be made is called the ‘payee’. A promissory note is an unconditional promise to pay put into writing by a person or entity and signed by the borrower or person making the promise. Promissory notes are often created between a borrower and a lender in which the borrower promises to pay the lender a specific amount of money by the specified date.
A promissory note, similar to a contract, contains all of the details pertaining to the transaction such as the amount borrowed, late fees, interest rates, and so forth, and should contain the term “promissory note” within the body. In terms of enforceability, a promissory note lies somewhere between an informal IOU and a formal loan contract.
Bill of exchange is another type of Negotiable Instrument. It is also in practice in the business sector. A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.
It is defined under section 2(g) of the Nepalese Negotiable Instrument Act, 2034. Section 2(g) defines as “A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money to, or to the order of a person or to a person or to the bearer of the instrument”.
On the basis of the above definition, there are three parties in the bill of exchange, which are as below:
Drawer: The maker of a bill of exchange.
Drawee: The person, who is directed to pay.
Payee: The person who receives the bill of exchange.
Another commonly used type of negotiable instrument is the bill of exchange. A bill of exchange is a financial document that states an individual or business will pay a certain amount on a specific date. The date may range from the date it is signed, to within six months into the future.
A bill of exchange must contain the signature of the individual promising to pay to be considered legally binding. Unlike a promissory note, a bill of exchange may be transferred to a third party, binding the payor to pay the third party who was not involved in the first place.
The cheque is a very common form of negotiable instrument. If you have a savings bank account or current account in a bank, you can issue a cheque in your own name or in favor of others, thereby directing the bank to pay the specified amount to the person named in the cheque. Therefore, a cheque may be regarded as a bill of exchange; the only difference is that the bank is always the drawee in case of a cheque.
The Negotiable Instruments Act, 1881 defines a cheque as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand. From the above dentition, it appears that a cheque is an instrument in writing, containing an unconditional order, signed by the maker, directing a specified banker to pay, on demand, a certain sum of money only to, to the order of, a certain person or to the bearer of the instrument.
The person who draws a cheque is called the “Drawer”. The banker on whom it is drawn is the “Drawee” and the person in whose favor it is drawn is the “payee”. Actually, a cheque is an order by the account holder of the bank directing his banker to pay on demand, the specified amount, to or to the order of the person named therein or to the bearer.
A Negotiable Instrument is a document guaranteeing the payment of a specific amount of money, either on demand or at a set time, with the payer usually named on the document. The Concept of the study Explains – Negotiable Instruments: Meaning, Definition of Negotiable Instruments, Characteristics of Negotiable Instruments, and Features of Negotiable Instruments. More specifically, it is a document contemplated by or consisting of a contract, which promises the payment of money without condition, which may be paid either on demand or at a future date. The term can have different meanings, depending on what law is being applied and what country and context it is used in. Also learned, Commercial Bills, Negotiable Instruments: Definition, Characteristics, and Features! Read and share the given article in Hindi.
Explain and Learn, Negotiable Instruments: Definition, Characteristics, and Features!
Negotiable Instruments Act: The law relating to “Negotiable Instruments” is contained in the Negotiable Instruments Act, 1881, as amended up-to-date. It deals with three kinds of negotiable instruments, i.e., Promissory Notes, Bills of Exchange and Cherubs. The provisions of the Act also apply to “hands” (an instrument in oriental language), unless there is a local usage to the contrary.
Other documents like treasury bills, dividend warrants, share warrants, bearer debentures, port trust or improvement trust debentures, railway bonds payable to bearer etc., are also recognized as negotiable instruments either by mercantile custom or under other enactments like the Companies Act, and therefore, Negotiable Instruments Act is applicable to them.
#Definition of Negotiable Instruments:
The word “Negotiable” means “Transferable by delivery”, and the word “Instrument” means “A written document by which a right is created in favor of some person”. Thus, the term “Negotiable instrument” literally means “a written document transferable by delivery”.
According to Section 13 of the Negotiable Instruments Act,
“A negotiable instrument means a promissory note, bill of exchange or cheque payable either to order or to bearer.”
The Act, thus, mentions three kinds of negotiable instruments, namely notes, bills and cherubs and declares that to be negotiable they must be made payable in any of the following forms:
A) Payable to order:
A note, bill or cheque is payable to order which is expressed to be “payable to a particular person or his order”.
But it should not contain any words prohibiting the transfer, e.g., “Pay to A only” or “Pay to A and none else” is not treated as “payable to order” and therefore such a document shall not be treated as the negotiable instrument because its negotiability has been restricted.
There is, however, an exception in favor of a cherub. A cheque crossed “Account Payee only” can still be negotiated further; of course, the banker is to take extra care in that case.
B) Payable to bearer:
“Payable to bearer” means “payable to any person whom so ever bears it.” A note, bill or cheque is payable to bearer which is expressed to be so payable or on which the only or last endorsement is an endorsement in blank.
The definition given in Section 13 of the Negotiable Instruments Act does not set out the essential characteristics of a negotiable instrument. Possibly the most expressive and all-encompassing definition of negotiable instrument had been suggested by Thomas who is as follows:
“A negotiable instrument is one which is, by a legally recognized custom of trade or by law, transferable by delivery or by endorsement and delivery in such circumstances that (a) the holder of it for the time being may sue on it in his own name and (b) the property in it passes, free from equities, to a bonfire transferee for value, notwithstanding any defect in the title of the transferor.”
#Characteristics of Negotiable Instruments:
An examination of the above definition reveals the following essential characteristics of negotiable instruments which make them different from an ordinary chattel:
Easy negotiability:
They are transferable from one person to another without any formality. In other words, the property (right of ownership) in these instruments passes by either endorsement or delivery (in case it is payable to order) or by delivery merely (in case it is payable to bearer), and no further evidence of transfer is needed.
The transferee can sue in his own name without giving notice to the debtor:
A bill, note or a cheque represents a debt, i.e., an “actionable claim” and implies the right of the creditor to recover something from his debtor. The creditor can either recover this amount himself or can transfer his right to another person. In case he transfers his right, the transferee of a negotiable instrument is entitled to sue on the instrument in his own name in case of dishonor, without giving notice to the debtor of the fact that he has become the holder.
The better title to a bonfire transferee for value:
A bonfire transferee off a negotiable instrument for value (technically called a holder in due course) gets the instrument “free from all defects.” He is not affected by any defect of title of the transferor or any prior party. Thus, the general rule of the law of transfer applicable in the case of ordinary chattels that “nobody can transfer a better title than that of his own” does not apply to negotiable instruments.
Examples of Negotiable Instruments:
The following instruments have been recognized as negotiable instruments by statute or by usage or custom:
Bills of exchange;
Promissory notes;
Cheques;
Government promissory notes;
Treasury bills;
Dividend warrants;
Share warrants;
Bearer debentures;
Port Trust or Improvement Trust debentures;
Hindus, and;
Railway bonds payable to bearer, etc.
Examples of Non-negotiable Instruments:
These are:
Money orders;
Postal orders;
Fixed deposit receipts;
Share certificates, and;
Letters of credit.
Endorsement:
Section 15 defines endorsement as follows: “When the maker or holder of a negotiable instrument signs the same, otherwise than as such maker, for the purpose of negotiation, on the back or face thereof or on a slip of paper annexed thereto, or so signs for the same purpose a stamped paper intended to be completed as negotiable instrument, he is said to endorse the same, and is called the endorser.”
Thus, an endorsement consists of the signature of the holder usually made on the back of the negotiable instrument with the object of transferring the instrument. If no space is left on the back of the instrument for the purpose of endorsement, further endorsements are signed on a slip of paper attached to the instrument. Such a slip is called “along” and becomes part of the instrument. The person making the endorsement is called an “endorser” and the person to whom the instrument is endorsed is called an “endorse.”
Kinds of Endorsements:
Endorsements may be of the following kinds:
Blank or general endorsement: If the endorser signs his name only and does not specify the name of the indorse, the endorsement is said to be in blank. The effect of a blank endorsement is to convert the order instrument into a bearer instrument which may be transferred merely by delivery.
Endorsement in full or special endorsement: If the endorser, in addition to his signature, also adds a direction to pay the amount mentioned in the instrument to, or to the order of, a specified person, the endorsement is said to be in full.
Partial endorsement: Section 56 provides that a negotiable instrument cannot be endorsed for a part of the amount appearing to be due on the instrument. In other words, a partial endorsement which transfers the right to receive only a partial payment of the amount due on the instrument is invalid.
Restrictive endorsement: An endorsement which, by express words, prohibits the indorse from further negotiating the instrument or restricts the indorse to deal with the instrument as directed by the endorser is called “restrictive” endorsement. The indorse under a restrictive endorsement gets all the rights of an endorser except the right of further negotiation.
Conditional endorsement: If the endorser of a negotiable instrument, by express words in the endorsement, makes his liability, dependent on the happening of a specified event, although such event may never happen, such endorsement is called a “conditional” endorsement.
In the case of a conditional endorsement, the liability of the endorser would arise only upon the happening of the event specified. But they endorse can sue other prior parties, e.g., the maker, acceptor etc. if the instrument is not duly met at maturity, even though the specified event did not happen.
Negotiable Instruments: Definition, Characteristics, and Features!
#Features of Negotiable Instruments:
Negotiable Instrument, in law, a written contract or another instrument whose benefit can be passed on from the original holder to new holders. The original holder (the transferor) must countersign the instrument (as in the case of a cheque) or merely deliver it (as in the case of a bank note) to the new holder; the new holder is then entitled to the benefit of the instrument (in the case of a cheque, to the money from the bank; in the case of the banknote, to the sum promised on the note).
According to section 13 of the Negotiable Instruments Act, 1881, a negotiable instrument means,
“Promissory note, bill of exchange, or cheque, payable either to order or to bearer.”
Major features of negotiable instruments are:
The following features below are:
Easy Transferability:
A negotiable instrument is freely transferable. Usually, when we transfer any property to somebody, we are required to make a transfer deed, get it registered, pay stamp duty, etc. But, such formalities are not required while transferring a negotiable instrument.
The ownership is changed by mere delivery (when payable to the bearer) or by valid endorsement and delivery (when payable to order). Further, while transferring it is also not required to give notice to the previous holder.
Title:
Negotiability confers an absolute and good title on the transferee. It means that a person who receives a negotiable instrument has a clear and indisputable title to the instrument.
However, the title of the receiver will be absolute, only if he has got the instrument in good faith and for consideration.
Also, the receiver should have no knowledge of the previous holder having any defect in his title. Such a person is known as the holder in due course.
Must be in writing:
A negotiable instrument must be in writing. This includes handwriting, typing, computer print out and engraving, etc.
Unconditional Order:
In every negotiable instrument, there must be an unconditional order or promise for payment.
Payment:
The instrument must involve the payment of a certain sum of money only and nothing else.
For example, one cannot make a promissory note on assets, securities, or goods.
The time of payment must be certain:
It means that the instrument must be payable at a time which is certain to arrive. If the time is mentioned as “when convenient” it is not a negotiable instrument.
However, if the time of payment is linked to the death of a person, it is nevertheless a negotiable instrument as death is certain, though the time thereof is not.
The payee must be a certain person:
It means that the person in whose favor the instrument is made must be named or described with reasonable certainty.
The term “person” includes individual, body corporate, trade unions, even secretary, director or chairman of an institution. The payee can also be more than one person.
Signature:
A negotiable instrument must bear the signature of its maker. Without the signature of the drawer or the maker, the instrument shall not be a valid one.
Delivery:
Delivery of the instrument is essential. Any negotiable instrument like a cheque or a promissory note is not complete until it is delivered to its payee.
For example, you may issue a cheque in your brother”s name but it is not a negotiable instrument until it is given to your brother.
Stamping:
Stamping of Bills of Exchange and Promissory Notes is mandatory. This is required as per the Indian Stamp Act, 1899. The value of stamp depends upon the value of the pro-note or bill and the time of their payment.
Right to file suit:
The transferee of a negotiable instrument is entitled to file a suit in his own name for enforcing any right or claim on the basis of the instrument.
Notice of transfer:
It is not necessary to give notice of transfer of a negotiable instrument to the party liable to pay.
Presumptions:
Certain presumptions apply to all negotiable instruments, for example, consideration is presumed to have passed between the transferor and the transferee.
Procedure for suits:
In India, a special procedure is provided for suits on promissory notes and bills of exchange.
The number of transfer:
These instruments can be transferred indefinitely until they are at maturity.
Rule of evidence:
These instruments are in writing and signed by the parties, they are used as evidence of the fact of indebtedness because they have special rules of evidence.
The cheque is an important negotiable instrument that can transfer by mere hand delivery. The Concept of the study Explains – Cheque Meaning, Definition, What is Checking Accounts? Types, The Different Kinds of Cheque, and Features. The cheque uses to make a safe and convenient payment. It is less risky and the danger of loss minimizes. Also Learn, Bill of Exchange.
Explain and Learn, Cheque: Meaning, Definition, Types, and Features.
A cheque is a very common form of the negotiable instrument. If you have a savings bank account or current account in a bank, you can issue a cheque in your name or favor of others, thereby directing the bank to pay the specified amount to the person named in the cheque.
Therefore, a cheque may regard as a bill of exchange; the only difference is that the bank is always the drawee in case of a cheque. The Negotiable Instruments Act, 1881 defines a cheque as a bill of exchange drawn on a specified banker and not expressed to be payable otherwise than on demand.
From the above dentition, it appears that a cheque is an instrument in writing, containing an unconditional order, signed by the maker, directing a specified banker to pay, on-demand, a certain sum of money only to, to the order of, a certain person or to the bearer of the instrument.
The person who draws a cheque calls the “drawer”. The banker on whom it draws is the “drawee” and the person in whose favor it draws is the “payee”. A cheque is an order by the account holder of the bank directing his banker to pay on demand, the specified amount, to or to the order of the person named therein or to the bearer.
Definition of a Cheque:
The definition below is;
“Cheque is an instrument in writing containing an unconditional order, addressed to a banker, sign by the person who has deposited money with the banker, requiring him to pay on demand a certain sum of money only to or to the order of the certain person or to the bearer of the instrument.”
What is Checking Accounts?
To open a checking account, a person deposits a sum of money in a bank. The bank gives him a checkbook with blank check forms and provides him with a means of keeping a record of the checks he writes and the amount of money he still has on deposit. The bank gives him a receipt for each new deposit and sends him a statement (usually monthly) showing a complete record of all transactions.
All concealed checks (checks that have been cashed by the bank) are returned with the statement, providing the depositor with proof that payment was received. The bank usually makes a small service charge on every account, and perhaps also a charge for each check written. Ordinarily, no interest pays on checking accounts.
More Things…
To make out a check, the depositor writes the date, the name of the payee (the person or firm who is to receive the money), and the amount. He then signs his name. Before cashing the check the payee must endorse it by signing his name on the back. He then either deposits it in a bank or exchanges it for cash by giving the check to a bank, currency exchange, business firm, or individual. The new owner can endorse the check to someone else or can deposit it in a bank.
When a check reaches a bank, it is forwarded through a clearing-house back to the bank on which it was drawn. After making sure the depositor’s signature is genuine, this bank, in turn, pays the cashing bank through the clearinghouse. The biggest danger in accepting a check is that the person writing it may not have enough money (or any money) in the bank to cover it. Forgery is another danger. The best defense against “bad checks” is to refuse to accept checks from strangers.
Types of Cheque:
Cheques are of four types.
Open cheque:
A cheque is called “Open” when it is possible to get cash over the counter at the bank. The holder of an open cheque can do the following:
Receive its payment over the counter at the bank.
Deposit the cheque in his account.
Pass it to someone else by signing on the back of a cheque.
Crossed cheque:
Since open cheque is subject to the risk of theft, it is dangerous to issue such cheques. This risk can avoid by issuing other types of cheque called “Crossed cheque”. The payment of such cheque does not make over the counter at the bank. It is only credited to the bank account of the payee. A cheque can cross by drawing two transverse parallel lines across the cheque, with or without the writing “Account payee” or “Not Negotiable”.
Bearer cheque:
A cheque which is payable to any person who presents it for payment at the bank counter calls ‘Bearer cheque’. A bearer cheque can be transferred by mere delivery and requires no endorsement.
Order cheque:
An order cheque is one that is payable to a particular person. In such a cheque the word ‘bearer’ may cut out or cancel and the word ‘order’ may write. The payee can transfer an order cheque to someone else by signing his or her name on the back of it.
There is another categorization of cheques which discusses below:
Ante-dated cheques: Cheque in which the drawer mentions the date earlier to the date of presenting if for payment. For example, a cheque issued on 24th March 2011 may bear a date 4th March 2011.
Stale Cheque: A cheque that issues today must be presented before at the bank for payment within a stipulated period. After expiry of that period, no payment will make and it then calls ‘stale cheque’
Mutilated Cheque: In case a cheque is torn into two or more pieces and presented for payment, such a cheque calls a mutilated cheque. The bank will not make payment against such a cheque without getting confirmation of the drawer. But if a cheque is torn at the corners and no material fact is erased or canceled, the bank may make payment against such a cheque.
Post-dated Cheque: Cheque on which drawer mentions a date which is after the date on which it is presented, is called post-dated cheque. For example, if a cheque presented on 8th May 2003 bears a date of 27th March 2011, it is a post-dated cheque. The bank will make payment only on or after 27th March 2011.
Different Kinds of Cheques:
They are below;
Bearer Cheque:
When the words “or bearer” appearing on the face of the cheque are not canceled, the cheque is called a bearer cheque. The bearer cheque is payable to the person specified therein or to any other else who presents it to the bank for payment. However, such cheques are risky, this is because if such cheques are lost, the finder of the cheque can collect payment from the bank.
Order Cheque:
When the word “bearer” appearing on the face of a cheque is canceled and when in its place the word “or order” is written on the face of the cheque, the cheque is called an order cheque. Such a cheque is payable to the person specified therein as the payee, or to anyone else to whom it is endorsed (transferred).
Uncrossed / Open Cheque:
When a cheque is not crossed, it is known as an “Open Cheque” or an “Uncrossed Cheque”. The payment of such a cheque can be obtained at the counter of the bank. An open cheque may be a bearer cheque or an order one.
Crossed Cheque:
The crossing of cheque means drawing two parallel lines on the face of the cheque with or without additional words like “& CO.” or “Account Payee” or “Not Negotiable”. A crossed cheque cannot be encashed at the cash counter of a bank but it can only be credited to the payee’s account.
Anti-Dated Cheque:
If a cheque bears a date earlier than the date on which it is presented to the bank, it is called as “anti-dated cheque”. Such a cheque is valid for up to three months from the date of the cheque.
Post-Dated Cheque:
If a cheque bears a date that is yet to come (future date) then it is known as the post-dated cheque. A post-dated cheque cannot be honored earlier than the date on the cheque.
Stale Cheque:
If a cheque is presented for payment after three months from the date of the cheque it is called stale cheque. A stale cheque is not honored by the bank.
Features of a Cheque:
The cheque is one of the important negotiable instruments. It is frequently used by the people and the business community in the course of their personal and business transactions. The definition of the cheque has been given in Section 6 of Negotiable Instrument Act in these words, “A cheque is a bill of exchange drawn on a specified banker and is expressed to the payable, otherwise than on demand.”
The essential requisites of the cheque areas;
Must be in Writing:
The cheque may be written in hand by using ink or ballpoint pen, typed or even it may be printed. But the customer should not use the pencil to fill up the cheque form. Even though other columns may be permitted to be written in hand or printed or typed, the signatures should be made by ink pen or ballpoint pen by the maker.
Must be Unconditional:
The order to pay the amount must be unconditional. If there is any condition imposed to pay the amount to the holder of the cheque then it will not be considered as a cheque. A cheque made payable on the happening of a contingent event is void ab-initio.
Must be Drawn on a Specified Banker:
For the validity of a Cheque, it must draw on a specified banker. If there is not mentioned in the cheque about the banker it would not be a valid cheque. In addition to it, it must contain all the three parties i.e. Drawer, Drawee, and Payee.
Certain Sum of Money:
It is one of the essential requirements of the Cheque that it must be payable in money and money only. It is not in terms of the money then it will be a valid one. The sum mentioned in it must be certain.
Certain Payee:
The parties of the Cheque must be certain. There are three parties to the cheque i.e. Drawer, Drawer, and Payee. In a valid Cheque the name of the must contain in other words they must be certain. It must contain an order, which must be unconditional. If any condition were imposed then it would not be a valid cheque.
Date:
In a valid cheque, it must signs by the drawer with date otherwise it would not be a valid cheque. It must write in hand by using ink or ballpoint pen, typed or even it may print as it becomes conclusive proof i.e. presumption under Section 118(b) unless the contrary proves.
Parties to the Cheque:
The maker of a cheque calls the ‘Drawer’, the person thereby directed to pay calls ‘Drawee’ and the person named in the instruments, to whom or to whose order the money is by the instrument directly to pays, and calls the “Payee.”
The person entitled in his name to the possession of the cheque and to receive or recover the amount due to calls the “Holder of the cheque.”
The person who for consideration becomes the possessor of the cheque is payable to bearer, or the payee or endorsee thereof, if payable to order, before the amount mentioned in it became payable and without having sufficient cause to believe that any defect existed in the title of the person from whom he derived his title is called the “Holder in due course.”
The maker or the holder of the cheque signs his name (endorse) on the back of the cheque for negotiable and he says to be the ‘Endorser.’ The endorser who signs his name and directs to pay the amount mentioned in the cheque to, or the order of, a specified person, and the person so specified calls the “Endorsee” of the cheque.
Explain and Learn, Bill of Exchange: Meaning, Definition, and Features!
A bill of exchange is generally drawn by the creditor on his debtor. The Concept of the study Explains – Bill of Exchange: What is a Bill of Exchange? Meaning of Bill of Exchange, Definition of Bill of Exchange, and Features of Bill of Exchange! It should be accepted either by the debtor or any person(s) on his/her behalf. It is worth mentioning that before its acceptance by the debtor, it is just a draft. It should be accepted either by a person upon whom it is drawn or someone else on his/her behalf. The stage at which the purchaser of goods signs the draft and writes ‘Accepted’ on it, it becomes a bill of exchange. Also learned, Bill of Exchange: Meaning, Definition, and Features!
What is a Bill of Exchange?
According to section 5 of the Negotiable Instruments Act, 1881, defines Bill Of Exchange as “A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person or to the bearer of the instrument.”
A promise or order to pay is not “conditional”, within the meaning of this section and section 4, by reason of the time for payment of the amount or any installment thereof being expressed to be on the lapse of certain period after the occurrence of a specified event which, according to the ordinary expectation of mankind, is certain to happen, although the time of its happening may be uncertain.
The sum payable may be “certain”, within the meaning of this section and section and section 4, although it includes future indicated rater of change, or is according to the course of exchange, or is according to the course of exchange, and although the instrument provides that, on default of payment of an installment, the balance unpaid shall become due.
The person to whom it is clear that the direction is given or that payment is to be made may be a “certain person,” within the meaning of this section and section 4, although he is misnamed or designated by description only.
Meaning of Bill of Exchange:
T.P Mukherjee law Dictionary with pronunciation defines Bill of Exchange as under: “A bill of exchange is an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay, on demand or at a fixed or determinable future time, a sum certain in money to or the order of a specified person or to bearer.”
The legal and commercial dictionary defines Bill of Exchange as under: “Bill of Exchange includes a hundi and a cheque. A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of certain. The person or to the bearer of the instrument.”
Black‘s Law Dictionary defines Bill of Exchange as under: “Bill of Exchange. A three-party instrument in which the first party draws an order for the payment of a sum certain on the second party for payment to a third party at a definite future time.”
Wharton ‘s law lexicon Dictionary defines Bill of exchange as under: “As an unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time a sum certain in money to or to the order of a specified person, or to bearer.”
K.J. Aiyers judicial Dictionary defines Bill of Exchange as under: “It is a written order or request by one person to another for the payment of money at a specified time absolutely and at all events. A bill of exchange is only a transfer of a chose in action according to the custom of merchants, it is an authority to one person to pay to another the sum which is due to the first.”
P.G. Osborn’s. The concise commercial Dictionary defines Bill of Exchange as under: “An unconditional order in writing, addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at a fixed or determinable future time, a sum certain in money, to or to the order of, a specified person, or to bearer. A bill of exchange is a negotiable instrument.”
Mitra’s legal and commercial Dictionary defines Bill of Exchange as under: “A bill of exchange means a bill of exchange as defined in the Negotiable Instruments Act 1881, and includes also a hundi, and any other document entitling or purporting to entitle any person whether named therein or not, to payment by any other person of, or to draw upon any other person for, any sum of money.”
Stroud’s Judicial Dictionary defines Bill of Exchange as under: “An order to pay out of a particular fund is not unconditional within the meaning of this section, but an unqualified order to pay, coupled with (a) an indication of a particular fund out of which the drawee is to reimburse himself or a particular account to be debited with the amount, or (b) a statement of the transaction which gives rise to the bill, is unconditional.”
Jowitt’s Dictionary of English law defines Bill of Exchange as under: “An unconditional order in writing, addressed by one person (A) to another (B) signed by the person giving it, requiring the person to whom it is addressed to pay, on demand, or at a fixed or determinable future time, a sum certain in money to, or to the order of a specified person (c), or to bearer ( Bill of Exchange Act 1882, s3 ) A is called the drawee, B the drawer and C the payee. Sometimes, A the drawer is himself the payee. The holder of a bill may treat it as a promissory note (q.v) if the drawer and drawee are the same person s5(2), when B, the drawee, has, by accepting the bill, undertaken to pay it, he is called the acceptor.”
Definition of Bill of Exchange:
A bill of exchange is an instrument in writing containing an unconditional order, signed by the maker, directing a certain person to pay a certain sum of money only to, or to the order of, a certain person, or to the bearer of the instrument. —Section 5 of the Negotiable Instruments Act, 1881.
Bill of exchange is a negotiable instrument which is payable either to order or to the bearer. Section 13 (1) of the Negotiable Instruments Act, 1881 defines negotiable instruments as “A promissory note, bill of exchange or cheque payable either to order or to bearer”.
Definition: Bill of Exchange, can be understood as a written negotiable instrument, that carries an unconditional order to pay a specified sum of money to a designated person or the holder of the instrument, as directed in the instrument by the maker. The bill of exchange is either payable on demand, or after a specified term.
In a business transaction, when the goods are sold on credit to the buyer, the seller can make the bill and send it to the buyer for acceptance, which contains the details such as name and address of the seller and buyer, amount of bill, maturity date, signature, and so forth.
Features of Bill of Exchange:
The definition of a Bill of Exchange under the act is fairly exhaustive and almost covers all the aspects related to it at one place. A Bill of Exchange requires three parties.
The drawer, i.e. the person who is the maker of the bill and who gives the order.
The drawee, i.e. the person who is directed to pay the bill and who on affixing his signature becomes the acceptor; and
The payee, i.e. the person to whom or to whose order the amount of the instrument is payable unless the bill is payable to bearer.
To analysis of the definition shows the following essential requisites of a bill of exchange:
A Bill of Exchange must be in Writing: A bill of exchange may be written in any language, and any form of words may be used, provided the requirements of this section are complied with.
A Bill of Exchange must Contain an Order to Pay: When a bill of exchange is drawn, the presumption is that there are funds in the hands of the person to whom the order is given, which are payable in any case to the person giving the order. The essence of a bill of exchange is that the drawer orders the drawee to pay money to the payee. As a bill of exchange is an order, it is necessary that it must, in its terms, be imperative and not perceptive.
The Order Contained in the Bill Should be Unconditional: It is the essence of a bill that it should be payable at all events, A bill of exchange cannot be drawn so as to be payable conditionally. The drawer’s order to the drawee must be unconditional and should not make the payment of the bill dependent on some contingency. Where an instrument is payable on a contingency, it does not cease to be invalid by the happening of the event before the expiry of the period fixed for the performance of the obligation, for the instrument must be valid ab initio, and carry its validity on its face. A conditional bill of exchange is invalid. The addition of the words as per agreement does not make a note conditional.
Bills Payable Out of a Particular Fund: On the same principle, a bill expressed to be payable out of a particular fund is conditional and invalid, because it is uncertain whether the fund will be in existence or prove sufficient when the bill becomes payable. Thus a bill containing an order to pay ‘out of money due from A as soon as you receive it, or out of money remaining in your hands belonging to X company is invalid.
A Bill of Exchange must be Signed by the Drawer: A Bill is not valid unless the drawer signs it and if Drawer has not signed it no action can be maintained against the acceptor or any other party who has affixed his signature these too. If the drawer is unable to write his name, he can sign by a mark in lieu of a signature.
The Drawee must be Certain: The next requisite is that the instrument must order a person to pay the amount of the bill. The person to whom the bill is addressed is called the ‘drawee’ and he must be named or otherwise indicated in the bill with reasonable certainty. So that the payee knows the person to whom he should present the instrument for acceptance and payment. A bill cannot be addressed to two or more drawee in the alternative because it would create difficulties as to recourse if the bill were dishonored.
The Sum Payable must be Certain: The sum payable is certain even though it is required to be paid with interest, or at the indicated rate of exchange or by installment with the proviso that on the default in the payment of installment, the whole amount shall become due and payable.
The Instrument must Contain an Order to Pay Money and Money only: The medium of payment should be the legal tender i.e. money and nothing else. An instrument containing the order to pay money along with some other thing or merely some other thing is not a valid bill. An instrument ordering the delivery up of houses and a wharf in addition to the payment of a sum of money is not a valid bill.
The Payee must be Certain: A bill must state with certainty the person to whom payment is to be made. A bill of exchange ought to specify to whom the same is payable, for in no other way can the drawee, if he accepts it, know to whom he may properly pay it so as to discharge himself from all further liability. Where a bill is payable to bearer, the payee is indicated with certainty. Bills are rarely drawn payable to bearer, but cheques are commonly so drawn. A bill cannot be drawn payable to bearer on demand. Where in a bill the drawee or payee is misnamed or misdescribed, extrinsic evidence is admissible to identify him.
Just like commercial bills which represent commercial debt, treasury bills represent short-term borrowings of the Government. As well as discuss the Commercial Bills, this article explains Treasury Bills. The Treasury Bills explain in their key points; meaning, features, types, and importance. Treasury bill market refers to the market where treasury bills buy and sell. Treasury bills are very popular and enjoy a higher degree of liquidity since they issue by the government.
Explain and Learn, Treasury Bills: Meaning, Features, Types, and Importance!
Meaning and Features of Treasury Bills:
A treasury bills nothing but promissory note issued by the Government under discount for a specified period stated therein. The Government promises to pay the specified amount mentioned therein to the beater of the instrument on the due date. The period does not exceed one year. It is purely a finance bill since it does not arise out of any trade transaction. It does not require any “grading” or “endorsement” or “acceptance” since it claims against the Government.
Treasury bill issues only by the RBI on behalf of the Government. Treasury bills issue for meeting temporary Government deficits. The Treasury bill rate of discount is fixed by the RBI from time-to-time. It is the lowest one in the entire structure of interest rates in the country because of short-term maturity and degree of liquidity and security.
Definition of Treasury Bills:
Treasury Bills, also known as T-bills are the short-term money market instrument, issued by the central bank on behalf of the government to curb temporary liquidity shortfalls. These do not yield any interest, but issued at a discount, at its redemption price, and repaid at par when it gets matured.
T-bills are the key segment of the financial market, which utilizes by the government to raise short-term funds, for fulfilling periodic discrepancies between its receipts and expenditure. The difference between the issue price and the redemption value indicates the interest on treasury bills, call as a discount. These are the safest investment instrument of its category, as the risk of default is negligible. Further, the date of issue predetermine, as well as the amount also fixed.
Features of Treasury Bills:
The following features of treasury bills below are;
Form:
T-bills are issued either in physical form as a promissory note or dematerialized form by a credit to Subsidiary General Ledger (SGL) Account.
Eligibility:
Individuals, firms, companies, trust, banks, insurance companies, provident funds, state government, and financial institutions are eligible to invest in treasury bills.
Minimum Bid:
The minimum amount of bid is Rs. 25000 and in multiples thereof.
Issue price:
T-bills are issued at a discount but redeemed at par.
Repayment:
The repayment of the bill is made at par on the maturity of the term.
Availability:
Treasury bills are highly liquid negotiable instruments, that are available in both financial markets, i.e. primary and secondary.
Method of the auction:
Uniform price auction method for 91 days T-bills, whereas multiple price auction method for 364 days T-bill.
Day count:
The day count is 364 days, in a year, for treasury bills.
Besides this, other characteristics of treasury bills include the market-driven discount rate, selling through auction, issued to meet short-term mismatches in cash flows, assured yield, low transaction cost, etc.
Types of Treasury Bills:
In India, there are two types of treasury bills viz.
Ordinary or regular and
“Ad hoc” known as “Ad Hoc’s” ordinary treasury bills are issued to the public and other financial institutions for meeting the short-term financial requirements of the Central Government.
These bills are freely marketable and they can buy and sell at any time and they have secondary market also.
On the other hand ‘ad Hoc’s’ are always issued in favor of the RBI only. They are not sold through tender or auction. Also, they are purchased by the RBI on top and the RBI authorizes to issue currency notes against them.
Government explains:
They are marketable sell them back to the RBI. Ad Hoc’s serve the Government in the following ways:
They replenish the cash balances of the central Government. Just like State Government get advance (ways and means advances) from the RBI, the Central Government can raise finance through this Ad Hocs.
They also provide an investment medium for investing the temporary surpluses of State Government, semi-government departments and foreign central banks.
Based on periodicity, treasury bills may classify into three they are:
91 days T-bills:
The tenor of these bills complete on 91 days. These are an auction on Wednesday, and the payment makes on the following Friday.
182 days T-bills:
These treasury bills get matured after 182 days, from the day of issue, and the auction is on Wednesday of non-reporting week. Moreover, these are repaying on following Friday, when the term expires.
364 days T-bills:
The maturity period of these bills is 364 days. The auction is on every Wednesday of reporting week and repay on the following Friday after the term gets over.
Treasury bills are backed by some advantages like no tax deducted at source, high liquidity and trade-ability, zero risks of default, transparency, a good return on investment and so on.
Ninety-one day’s treasury bills are issuing at a fixed discount rate of 4% as well as through auctions. 364 days bills do not carry any fixed rate. The discount rate on these bills quotes in the auction by the participants and accepted by the authorities. Such a rate calls cut off rate. In the same way, the rate is fixed for 91 days treasury bills sold through auction. 91 days treasury bills (top basis) can rediscount with the RBI at any time after 14 days of their purchase. Before 14 days a penal rate charges.
Operations and Participants:
The RBI holds day’s treasury bills (TBs) and they issue on top basis throughout the week. However, 364 days TBs are selling through the auction which conducts once in a fortnight. The date of auction and the last date of submission of tenders are notified by the RBI through a press release. Investors can submit more than one bid also.
On the next working day of the date auction, the accepted bids with prices are displaying. The successful bidders have to collect letters of acceptance from the RBI and deposit the same along with the cheque for the amount due on RBI within 24 hours of the announcement of auction results.
Institutional investors like commercial banks, DFHI, STCI, etc, maintain a subsidiary General Ledger (SGL) account with the RBI. Purchases and sales of TBs are automatically recording in this account invests who do not have SGL account can purchase and sell TBs through DFHI. The DFHI does this function on behalf of investors with the bits of the help of SGL transfer forms. The DFHI is actively participating in the auctions of TBs.
It is playing a significant role in the secondary market also by quoting daily buying and selling rates. It also gives buy-back and sell-back facilities for the period’s up to 14 days at an agreed rate of interest to institutional investors. The establishment of the DFHI has imported greater liquidity in the TB market.
The participants in this market are the followers:
RBI and SBI.
Commercial banks.
State Governments.
DFHI.
STCI.
Financial institutions like LIC, GIC, UTI, IDBI, ICICI, IFCI, NABARD, etc.
Corporate customers, and.
Public.
Through many participants are there, in actual practice, this market is in the hands of the banking sector. It accounts for nearly 90 % of the annual sale of TBs.
Importance of Treasury Bills:
The following importance of treasury bills below is:
Safety:
Investments in TBs are highly safe since the payment of interest and repayment of principal are assured by the Government. They carry zero default risk since they are issuing by the RBI for and on behalf of the Central Government.
Liquidity:
Investments in TBs are also highly liquid because they can convert into cash at any time at the option of the inverts. The DFHI announces daily buying and selling rates for TBs. They can discount with the RBI and further refinance facility is available from the RBI against TBs. Hence there is a market for TBs.
Ideal Short-Term Investment:
Idle cash can profitably invest for a very short period in TBs. TBs are available on top throughout the week at specified rates. Financial institutions can employ their surplus funds on any day. The yield on TBs also assures.
Ideal Fund Management:
TBs are available on top as well through periodical auctions. They are also available in the secondary market. Fund managers of financial institutions build the portfolio of TBs in such a way that the dates of maturities of TBs may match with the dates of payment on their liabilities like deposits of short-term maturities. Thus, TBs help financial manager’s it manages the funds effectively and profitably.
Statutory Liquidity Requirement:
As per the RBI directives, commercial banks have to maintain SLR (Statutory Liquidity Ratio) and for measuring this ratio of investments in TBs takes into account. TBs are eligible securities for SLR purposes. Moreover, to maintain CRR (Cash Reserve Ratio). TBs are very helpful. They can readily convert into cash and thereby CRR can maintain.
Source of Short-Term Funds:
The Government can raise short-term funds for meeting its temporary budget deficits through the issue of TBs. It is a source of cheap finance to the Government since the discount rates are very low.
Non-Inflationary Monetary Tool:
TBs enable the Central Government to support its monetary policy in the economy. For instance excess liquidity, if any, in the economy can absorb through the issue of TBs. Moreover, TBs are subscribing by investors other than the RBI. Hence they cannot mention and their issue does not lead to any inflationary pressure at all.
Hedging Facility:
TBs can use as a hedge against heavy interest rate fluctuations in the call loan market. When the call rates are very high, money can raise quickly against TBs and invest in the call money market and vice versa. TBs can use in ready forward transitions.
Defects of Treasury Bills:
The following defects of treasury bills below are;
Poor Yield:
The yield form TBs is the lowest. Long-term Government securities fetch more interest and hence subscriptions for TBs are on the decline in recent times.
Absence Of Competitive Bids:
Though TBs sell through auction to ensure market rates for the investors, in actual practice, competitive bids are conspicuously absent. The RBI compels to accept these non-competitive bids. Hence adequate return is not available. It makes TBs unpopular.
Absence Of Active Trading:
Generally, the investors hold TBs till maturity and they do not come for circulation. Hence, active trading in TBs adversely affects.
The Concept of Financial Decisions, The Factors Influencing Financial Decisions: 1. External Factors, and 2. Internal Factors, Fully Explain It by PDF and Free Download, and What is the Importance of Financial Decisions? Definition: The Financing Decision is yet another crucial decision made by the financial manager relating to the financing-mix of an organization. It is concerned with the borrowing and allocation of funds required for the investment decisions. Also learned, The Factors Influencing and Importance of Financial Decisions!
Learn and Understand, The Factors Influencing and Importance of Financial Decisions!
The financing decision involves two sources from where the funds can be raised: using a company’s own money, such as share capital, retained earnings or borrowing funds from the outside in the form debenture, loan, bond, etc. The objective of financial decision is to maintain an optimum capital structure, i.e. a proper mix of debt and equity, to ensure the trade-off between the risk and return to the shareholders.
The Concept of Financial Decisions:
Financial decisions refer to decisions concerning financial matters to a business concern. Decisions regarding the magnitude of funds to be invested to enable a firm to accomplish its ultimate goal, kind of assets to be acquired, the pattern of capitalization, pattern of distribution of firm’s income and similar other matters are included in financial decisions.
These decisions are crucial for the well-being of a firm because they determine the firm’s ability to obtain plant and equipment when needed to carry the required amount of inventories and receivables, to avoid burdensome fixed charges when profits and sales decline and to avoid losing control of the company. Financial decisions are taken by a finance manager alone or in conjunction with his other executive colleagues of the enterprise. In principle, the finance manager is held responsible to handle all such problems as involve money matters.
But in actual practice, he has to call on the expertise of those in other functional areas: marketing, production, accounting, and personnel to carry out his responsibilities wisely. For instance, the decision to acquire a capital asset is based on the expected net return from its use and on the associated risk. These cannot be given values by the finance manager alone. Instead, he must call on the expertise of those in charge of production and marketing.
Similarly, the decision regarding allocation of funds as between different types of current assets cannot be taken by a finance manager in the vacuum. The policy decision in respect of receivables—whether to sell for credit, to what extent and on what terms is essentially financial matter and has to be handled by a finance manager. But at the operating level of carrying out the policies, sales may also be involved since decisions to tighten up or relax collection procedures may have repercussion on sales.
Similarly, in respect of inventory, while determining types of goods to be carried in stock and their size are a basic part of the sales function, a decision regarding the quantum of funds to be invested in inventory is the primary responsibility of the finance manager since funds must be supplied to finance inventory.
As against the above, the decision relating to the acquisition of funds for financing business activities is primarily a finance function. Likewise, the finance manager has to take a decision regarding the disposition of business income without consulting other executives since various factors involved in the decision affect the ability of a firm to raise funds. In sum, financial decisions are looked upon as cutting across functional, even disciplinary boundaries. It is in such an environment that a finance manager works as a part of total management.
The Factors Influencing Financial Decisions:
A finance manager has to exercise a great skill and prudence while taking financial decisions since they affect the financial health of an enterprise over a long period of time. It would, therefore, be in the fitness of things to take the decisions in the light of external and internal factors. We shall now give a brief account of the impact of these factors on financial decisions.
External Factors:
External factors refer to environmental factors within which a business enterprise has to operate. These factors are beyond the control and influence of the management. A wise management adopts policies that will be most suited to the present and prospective socio-economic and political conditions of the country.
The following external factors enter into decision-making process:
The State of Economy.
Structure of Capital and Money Markets.
State Regulations.
Taxation Policy.
Requirements for Investors, and.
Lending Policy of Financial Institutions.
Internal Factors:
Internal factors refer to those factors which are related with internal conditions of the firm such as nature of business, size of business, expected return, cost and risk, asset structure of business, structure of ownership, expectations about regular and steady earnings, age of the firm, liquidity in company funds and its working capital requirements, restrictions in debt agreements, control factor and attitude of the management.
Within the economic and legal environment of the country finance manager must take the financial decision, keeping in mind the numerous characteristics of the firm.
Impact of each of these factors upon financial decisions will now be discussed in the following lines.
Nature of Business.
Size of Business.
Expected Return, Cost, and Risk.
Asset Structure of the Firm.
Structure of Ownership.
Probabilities of Regular and Steady Earnings.
Age of the Firm.
Liquidity Position of the Firm and Its Working Capital Requirements.
These decisions are relatively more important because of the following reasons:
(1) Long-term Growth and Effect:
These decisions are concerned with long-term assets. These assets are helpful in production. Profit is earned by selling the goods so produced. It can, therefore, be said the more correct these decisions are, the greater will be the growth of business in the long run. In addition to that, these affect the future possibilities of the business.
(2) Large Amount of Funds Involved:
Decisions regarding fixed assets are included in the preview of capital budgeting. A large amount of capital is invested in these assets. If these decisions turn out to be wrong, there occurs the heavy loss of capital which is a scarce resource.
(3) Risk Involved:
Capital budgeting decisions are full of risk. There are two reasons for it. First, these decisions refer to a long period, and as such expected profits for several years are to be anticipated. These estimates may turn out to be wrong. Second, because of the heavy investment involved, it is very difficult to change the decision once taken.
(4) Irreversible Decisions:
Nature of these decisions is such as cannot be changed so quickly. For instance, if soon after setting up a cotton mill, it is thought of changing it, then the old machinery and other fixed assets will have to be sold at the throwaway price. In doing so, the heavy loss will have to be incurred. Changing these decisions, therefore, is very difficult.
Before we begin, first let’s understand the origin of word “FINANCE.” If we trace the origin of finance, there is evidence to prove that it is as old as human life on earth. The word finance was originally a French word. In the 18th century, it was adopted by English speaking communities to mean “the management of money.” Since then, it has found a permanent place in the English dictionary. Today, finance is not merely a word else has emerged into an academic discipline of greater significance. Finance is now organized as a branch of Economics.
Furthermore, the one word which can easily replace finance is “EXCHANGE.” Finance is nothing but an exchange of available resources. Finance is not restricted only to the exchange and/or management of money. A barter trading system is also a type of finance. Thus, we can say, Finance is an art of managing various available resources like money, assets, investments, securities, etc.
At present, we cannot imagine a world without Finance. In other words, Finance is the soul of our economic activities. To perform any economic activity, we need certain resources, which are to be pooled in terms of money (i.e. in the form of currency notes, other valuables, etc.). Finance is a prerequisite for obtaining physical resources, which are needed to perform productive activities and carrying business operations such as sales, pay compensations, reserve for contingencies (unascertained liabilities) and so on.
Hence, Finance has now become an organic function and inseparable part of our day-to-day lives. Today, it has become a word which we often encounter on our daily basis.
Q. What is Definition of Finance?
Finance is defined in numerous ways by different groups of people. Though it is difficult to give a perfect definition of Finance following selected statements will help you deduce its broad meaning.
1. In General sense, “Finance is the management of money and other valuables, which can be easily converted into cash.”
2. According to Experts, “Finance is a simple task of providing the necessary funds (money) required by the business of entities like companies, firms, individuals, and others on the terms that are most favorable to achieve their economic objectives.”
3. According to Entrepreneurs, “Finance is concerned with cash. It is so, since, every business transaction involves cash directly or indirectly.”
4. According to Academicians, “Finance is the procurement (to get, obtain) of funds and effective (properly planned) utilization of funds. It also deals with profits that adequately compensate for the cost and risks borne by the business.”
