What is a Definition? It is a statement of the meaning of a term (a word, phrase, or other set of symbols). As well as, Descriptions can classify into two large categories, intentional purposes (which try to give the essence of a term) and extensional purposes (which proceed by listing the objects that a term describes).
Another important category of definitions is the class of ostensive illustrations, which convey the meaning of a term by pointing out examples. Also, A term may have many different senses and multiple meanings and thus require multiple reports.
A statement of the meaning of a word or word group or a sign or symbol dictionary definitions. The statement expresses the essential nature of something, a product of defining.
The action or process of stating the meaning of a word or word group.
Economic Value Added (EVA)is aimed to be a measure of the wealth of shareholders. According to this theory, earning a return greater than the cost of capital increase value of company while earning less than the cost of capital decreases the value. For listed companies, Stewart defined another measure that assesses if the company has created shareholder value or not. Also Learned, EVA, What is MVA (Market Value Added)?
If the total market value of a company is more than the amount of capital invested in it, the company has managed to create shareholder value. However, if market value is less than capital invested, the company has destroyed shareholder value. The difference between the company’s market value and book value is called Market Valued Added or MVA.
From an investor’s point of view, Market Value Added (MVA) is the best final measure of a Company’s performance. Stewart states that MVA is a cumulative measure of corporate performance and that it represents the stock market’s assessment from a particular time onwards of the net present value of all a Company’s past and projected capital projects. MVA is calculated at a given moment, but in order to assess performance over time, the difference or change in MVA from one date to the next can be determined to see whether the value has been created or destroyed.
The Market Value Added (MVA) measure is based on the assumption that the total market value of a firm is the sum of the market value of its equity and the market value of its debt. Stewart defines Market Value Added (MVA) as the excess of market value of capital (both debt and equity) over the book value of capital.
Simply stated, Market Value Added (MVA) = Market value of the company – Capital invested in the company
Where,
Market value: For a public listed company it is calculated as the number of shares outstanding x share price + book value of debt (since the market value of debt is generally not available). In order to calculate the market value of a firm, we have to value the equity part at its market price on the date the calculation is made. The total investment in the Company since day one is then calculated as the interest-bearing debt and equity, which includes retained earnings. Present market value is then compared with total investment. If the former amount is greater than the latter, the Company has created wealth.
Capital invested: It is the book value of investments in the business made up of debt and equity.
Effectively, the formula becomes, Market Value Added (MVA) = Market value of equity – Book value of equity
According to Stewart, Market Value Added (MVA) tells us how much value company has added to or subtracted from its shareholder’s investments. Successful companies add their MVA and thus, increase the value of capital invested in the company. Unsuccessful companies decrease the value of capital originally invested in the company. Whether a company succeeds in creating MVA (increasing shareholder value) or not, depends on its rate of return.
If a company’s rate of return exceeds its cost of capital, the company will sell on stock markets with premium compared to the original capital and thus, have positive MVA. On the other hand, companies that have the rate of return smaller than their cost of capital, sell with discount compared to the original capital invested in the company.
Market Value Added (MVA) is a cumulative measure of corporate performance and that it represents the stock markets assessments from a particular time onwards of the net present value of all of a Company’s past and projected capital projects. The disadvantage of the method is that like EVA there can be a number of value-based adjustments made in order to arrive at the economic book value and that it is affected by the volatility from the market values since it tends to move in tandem with the market.
Economic Value Added (EVA) is a value-based financial performance measure, an investment decision tool and it is also a performance measure reflecting the absolute amount of shareholder value created. The Concept of EVA (Economic Value Added): Definition of Economic Value Added, Calculation of Economic Value Added, Measurement of Economic Value Added, formula, and Implementation Economic Value Added!
Learn, Explain EVA (Economic Value Added) Meaning, Definition, Calculation, and Implementation!
It computes as the product of the “excess return” made on investment or investments and the capital invested in that investment or investments. Also learned, EVA (Economic Value Added) Meaning, Definition, Calculation, formula, and Implementation!
“Economic Value Added (EVA) is the net operating profit minus an appropriate charge for the opportunity cost of all capital invested in an enterprise or project. It is an estimate of true economic profit or the amount by which earnings exceed or fall short of the required minimum rate of return investors could get by investing in other securities of comparable risk.”
Economic Value Added (EVA) Meaning and definition is a variation of residual income with adjustments to how one calculates income and capital. Stern Stewart & Co., a consulting firm based in New York, introduced the concept of EVA as a measurement tool in 1989 and trademarked it. The EVA concept often calls Economic Profit (EP) to avoid problems caused by trademarking.
What is the Economic Value Added (EVA)?
Economic Value Added is the financial performance measure that comes closer than any other to capture the true economic profit of an enterprise; Economic Profit = Total revenues from the capital – Cost of capital. Also, The basic idea of this criterion is to find, in microeconomics; where it says that the main goal of a company is the maximization of profit. However, it does not mean book profit (the difference between revenues and costs) but economical profit. The difference between economic and book profit is economic profit. It is the difference between revenues and economic costs, which includes book costs and opportunity costs.
Opportunity costs present by the amount of money lost by not investing sources (like capital, labor, and so on) to the best alternative use. Opportunity costs, in reality, represent mainly by interests from equity capital including risk-reward and sometimes lost wages too. In short; Book profit = Revenues – Costs. This leads to the conclusion that economic profit appears when its amount is higher than “normal” profit derived from the average cost of capital invested both by creditors (cost interests) and owners– shareholders (opportunity costs). Also, This is the basic idea of the new measure, EVA.
Calculation of EVA (Economic Value Added):
Economic Value Added (EVA) calculator is an operational measure that differs from conventional earnings measures in two ways. First, it explicitly charges for the use of capital (residual income measure). Secondly, it adjusts reported earnings to minimize accounting distortions and to better match the timing of revenue and expense recognition. As such, wealth maximization correlates with EVA maximization. Also, A positive EVA indicates that a company is generating economic profits; a negative EVA indicates that it is not; A measure of a company’s financial performance based on the residual wealth calculated by deducting the cost of capital from its operating profit after taxes. It also knows as economic profit.
Defines:
Economic Value Added (EVA) is defined as the estimate of true economic profit, the amount by which earnings exceed or fall short of the required minimum rate of return investors could get by investing in other securities of comparable risk. It is the net operating profit minus the appropriate charge for the opportunity cost of capital investment in an enterprise (both debt and equity). Also, The capital charge is the most distinctive and important aspect of EVA. Under conventional accounting, most of the companies appear profitable.
However, many are actually destroying shareholder value because the profits they earn are less than their cost of capital. Also, EVA corrects this error by explicitly recognizing that when managers employ capital, they must pay for it. By considering all capital costs, including the cost of equity, EVA shows the amount of wealth a business has created or destroyed in each reporting period.
Formula:
Expressed as a formula, Economic Value Added (EVA) for a given period can write as:
Economic Value Added (EVA) = NOPAT – Cost of Capital Employed = NOPAT – WACC x CE
Where 01;
NOPAT: Refers to the amount of profit remaining of the business after tax and adding back interest payments. Also, It can calculate as per accounting concept after making necessary adjustments for certain non-operating incomes and expenses.
WACC: Weighted Average Cost of Capital. It defines as the weighted average cost of both equity capital and debt. Also, It is the weighted average of both the specified costs with weights equal to the proportion of each in total capital. The tax shield of the debt adjusts with the cost of the debt.
CE: Capital employed or Invested capital refers to total assets (net of revaluation) net of non-interest-bearing liabilities. From an operating perspective, invested capital can define as Net Fixed Assets, plus investments plus Net Current Assets. Net Current Assets denote current assets net of Non-Interest Bearing Current Liabilities (NIBCLS). From a financing perspective, the same can define as Net Worth plus total borrowings. Total borrowings denote all interest-bearing debts.
OR equivalently, if the rate of return defines as NOPAT /Capital Employed; then, it tums into a more revealing formula.
EVA (Economic Value Added) = (Rate of Return – Cost of Capital) x Capital Employed
Where 02;
Rate of Return: NOPAT /Capital Employed
Capital Employed: Total of the balance sheet – Non Interest Bearing Current Liabilities (NIBCL) in the beginning of the year
Cost of Capital: (Cost of equity x Proportion of equity in Capital) + (Cost of debt x Proportion of debt in Capital)(1- Tax)
If Return on Investment defines as above after taxes; EVA can present with the following familiar terms:
EVA (Economic Value Added) = (ROI – WACC) x Capital Employed
Where 03;
Capital Employed: Net fixed assets – Revenue reserve – Capital Work in progress + Current assets – Funds Deployed outside the business – NIBCL
Measure:
EVA (Economic Value Added) measures by comparing Return on Capital Employed with Cost of Capita; also called Return Spread. A positive Return Spread indicates that earning is more than the cost of capital; thereby creating wealth for owners or stockholders. A negative Return Spread means earning is less than cost-of-capital; thus reducing the wealth of owners and stockholders. Economic Value Added (EVA) is an indicator of the market value of the service center’s owner’s equity, a measure especially important to closely-held companies; which do not have the benefit of a published stock price. For publicly traded companies, EVA correlates very closely with the stock price.
Economic Value Added (EVA) is an estimate of true economic profit and a tool that focuses on maximizing shareholders’ wealth. Also, Companies best utilize EVA as a comprehensive management tool. EVA has the strategic importance of focusing management and employees on the company’s primary goal of maximizing shareholder value. With this goal in mind, EVA can use tactically in several ways including shareholder reporting, financial benchmarking, management decision-making tools, and a foundation for incentive compensation plans.
Measurement of EVA (Economic Value Added):
It must note that the measurement of Economic Value Added (EVA) can make by using either an operating or financing approach. Under the operating approach, deducting cash operating expenses and depreciation from sales derives NOPAT. Interest expense excludes because it considers as a financing charge. Also, Adjustments, which refer to as equity equivalent adjustments, design; to reflect economic reality and move income and capital to a more economically based value. These adjustments consider with cash taxes deducted to arrive at NOPAT. EVA then measure by deducting the company’s cost of capital from the NOPAT value. The amount of capital to use in the EVA calculations is the same under either the operating or financing approach but calculate differently.
The operating approach starts with assets and builds up to invested capital, including adjustments for economically derived equity equivalent values. The financing approach, on the other hand, starts with debt and adds all equity and equity equivalents to arrive at the invested capital. Finally, the weighted average cost of capital; based on the relative values of debt and equity and their respective cost rates; use to arrive at the cost of capital multiplied by the capital employed and deducted from the NOPAT value. The resulting amount is the current period’s EVA.
Implementing EVA (Economic Value Added):
When a company decides to adopt EVA as a corporate performance measure; here is what it must do:
Step 1: Run an EVA analysis of the company; its publicly traded peers and business units.
Step 2: Draw up a definition of EVA that is simple and meets the company’s information needs, existing accounting data, organization, and management.
Step 3: Work out a compensation scheme that fits into the company’s business and culture. The incentive plan has to marry the EVA design with traditional concerns of shareholders and directors.
Step 4: Train all employees on the basics of EVA and how it affects shareholder value.
Step 5: Demonstrate the difference between EVA-led decisions vis-à-vis conventional methods through computer simulation exercises.
Positives of EVA:
No ceiling on the amount managers can take home as incentive pay.
Managers think like, act like, and are paid like owners.
Targets are set over a time horizon that is more than one year – usually three to five years – forcing a long-term view into managerial decision-making.
Cuts capital cost and inculcates financial discipline among employees.
Increasing EVA directly benefits the shareholder and has been found to have a positive influence on a company’s stock price.
Negatives of EVA:
Involves lots of complexity. Globally, Stern Stewart is said, in some cases, to make as many as 165 adjustments to work out the weighted average capital cost of companies.
Works better at the individual level than team level, unless goals are appropriately structured.
May make companies risk-averse. Also, New investments that look risky or difficult to quantify in terms of expected payback may never be made using EVA.
EVA (Economic Value Added): Meaning, Definition, Calculation, and Implementation; Image from Pixabay.
Learn, Explain Value Added: Definition, Beneficiaries, and Uses!
The traditional basic financial statements are balance sheet and Profit & Loss account. These statements generate and provide data related to financial performance only. The Concept of Value Added: Meaning of Value Added, Definition of Value Added, Beneficiaries of Value Added, and Uses of Value Added! They do not provide any information which shows the extent of the value or the wealth created by the company for a particular period. Hence, there arose a need to modify the existing accounting and financial reporting system so that the business unit is able to give importance to judge its performance by indicating the value or wealth created by it. Also learned, Value Added: Definition, Beneficiaries, and Uses!
Meaning of Value Added: Value-added describes the enhancement a company gives its product or service before offering the product to customers. Value-added applies to instances where a firm takes a product that may be considered a homogeneous product, with few differences (if any) from that of a competitor, and provides potential customers with a feature or add-on that gives it a greater perception of value.
To this direction inclusion of Value Added statement in financial reporting system is used. The Value Added concept is now a recognized part of the accountant’s repertoire. However, the concept of Value Added (VA) is not new. Value Added is a basic and broad measure of performance of an enterprise. It is a basic measure because it indicates the net output produced or wealth created by an enterprise. The Value Added of an enterprise may be described as the difference between the revenues received from the sale of its output, and the costs which are incurred in producing the output after making necessary stock adjustments.
Definition of Value Added:
Some definitions of Value Added are following:
E.S.Hendriksen has defined Value-added as: “The market price of the output of an enterprise less the price of the goods and services acquired by transfer from other firms.”
Morely has defined Value-added as:”The value, which the entity has added in a period that equals its sales fewer bought-in-goods and services.” i.e. This definition can be expressed in terms of the equation as follows: Value-added = (Sales) – (bought-in-goods &services)
The annual service of industries (ASI,1964) defines Value Added as: “Value Added (VA) = (gross ex-factory value of output)-(gross value of input) “. The term Value Added may simply be defined in economics as the difference between the value of output produced by a firm in a period, and the value of the inputs purchased from other firms.
According to John Sizer, “Value Added is the wealth the company has been able to create by its own and its employee’s efforts during a period. “
According to E.F.L Berch, “The added value of a firm or for any other organization is the Value Added to materials by the process of production. It also includes the gross margin on any merchanted or factored goods sold. “
According to Kohler, Value Added has been defined as: “That part of the costs of a manufactured or semi-manufactured product attributable to work performed on the constituent raw material. The value is arrived by deducting from the total value of the output of a firm and other incomes, the cost of raw materials, power, and fuel, water, etc, which are bought from other firms.” i.e, Value Added = (value of output + income from other sources) – (cost of material and services purchased from outside)
According to Evraert and Riahi Belkaoui, “Value Added is said to represent the total wealth of the firm that could be distributed to all capital providers, employees, and the government.”
According to Central Statistical Organization (CSO), India “Value Added represents the part of the value of the products which are created in the factory and is computed by deducting from the gross ex-factory value of output, the gross value of input”
The concept of Value Added:
The concept of value addition has been derived out from the very manufacturing process in which the firm’s raw materials are converted into finished goods. A company can add value to the efficient use of the resources available to it. These resources can be in the form of manual skills, technical skills, know-how, special purpose machines, factory layout, etc. The process of manufacturing begins with a certain quantum of raw material and goes through a conversion process to yield an output. This output is a product with new utility and market value which is different from the original cost of materials. The excess of such market value over the cost of materials is defined as Value Added.
The concept of Value Added is considerably old. It originated in the US treasury in the 18th century and periodically accountants have deliberated upon whether the concept should be incorporated in financial accounting practices. The preparation, presentation, and disclosure of Value Added statements (VAS) have come to be seen with greater frequency in most countries of Europe more particularly in Britain.
Value Added is the wealth created by the business during a particular period of time and the wealth or the value so created or added is distributed amongst different stakeholders who created it. The discussion paper `corporate report’ published in 1975 by the then Accounting Standards Steering Committee (now known as Accounting Standards Board) of UK advocated the publication of Value Added statement along with the conventional annual corporate report.
Value Added indicates the `new value’ or `wealth’ created by the enterprise during a specified period. No enterprise can grow if it fails to generate wealth. Thus, Value Added is a form of wealth. However, things like land, minerals, metals, coal, oil, timber, water and similar sort of things are wealth but they are provided by nature. Value Added is the kind of wealth that is generated by the efforts and ingenuity of mankind.
This can be understood from following examples:
At the primitive level, a man goes into the forest and cuts down a tree. He converts it into a house, furniture and other articles for his own use. In doing so he `adds value’ to the raw material provided by nature.
In the complex industrial society, a manufacturing business buys raw materials, components, fuel and other services. It converts these into products which can be sold for more than the cost of the raw materials and other purchases. In doing so, the business `adds value’ to the materials by the process of production.
A farmer-generated wealth by growing crops and breeding animals, then selling them for more than the cost of seeds, fertilizers, foodstuffs and other materials used.
Value Added may be generated even when little or no material is involved. The gap between what the consumer pays and what the manufacturer or supplier has to pay for the raw material, and other brought in items, is the Value Added that has been generated.
Value Added = Gross value of output – gross value of the input
Where,
Output = Aggregate value of product*+ work done for customers + sale value of goods sold in the same condition as bought + stock of semi-finished goods (i.e. closing and opening).
*Value of Products= value of product manufactured for sale during a year where the value is ex-factory, exclusive of any incidental expenses on sale.
Input= Gross value of materials, fuels, etc + work done by other concerns for the firms+ non-industrial services done + depreciation + purchase value of goods sold in the same condition as bought.
Thus,
Value Added = value of production – the cost of materials, power, etc
Where the value of production = sales value + value of increase or decrease in finished and semi-finished goods.
Beneficiaries of Value Added:
There are four main beneficiaries of the net value added created by an enterprise. These beneficiaries are workers, providers of capital, government, and the owners. As a matter of principle, the beneficiaries are the persons contributing or providing their efforts or facilities directly or indirectly.
Workers: Labour is one of the major claimants of value added. The value-added statement shows the amount of value added that goes to the human resources. The payments to the workers can be in the form of :
Salaries and wages
Payment of bonus
Contribution to provident fund, ESU, etc.
Welfare expenses
Payment of gratuity
Directors’ remuneration, etc.
Providers of capital: Banks, Financing institutions, public and the owners provide capital to the enterprise, but under this caption, providers of only interest-bearing funds are taken into consideration.
Government: The government which provides not only infrastructural facilities but also conditions conducive for carrying out operational activities has also its claim in the value added. The payment to the government goes in the form of :
Excise duty
Octroi duty
Rates and taxes
Sales tax
Direct taxes
Owners: Last but not the least owners or shareholders are the ultimate claimants of the value added. The transfer to owners may be in the form of the transfer to various non-statutory reserves or profits distributed.
Uses of Value Added:
Till recently, the yardstick to judge the efficiency and profitability was Return on Investment (ROI) but, nowadays too much interest has been shown on `value added’ and it is considered as another approach to measuring operational efficiency and profitability of a business enterprise. The reason behind this is that the performance of an enterprise is now judged by the `social obligation point of view’. The profit is a test for shareholders to measure the performance of an enterprise while `value added’ is a measure useful to all those of the society who have contributed in the process of generating value such as employees, investors of capital, government, etc. No enterprise can survive and grow if it fails to generate sufficient value.
Value-added reflects the performance of a team, which is, employees, managers, shareholders, creditors. Value-added statement helps the employees to perceive them as responsible participators in a team effort with management and thus may motivate them to work harder. The value-added statement provides a better measure of the size and importance of a company. VA based ratios are interpreted as merely indicative of and predictive of the strength of the company than conventional ratios.
VA can be used as a basis for wage and salary policies. The index for value added per employee is a vital figure because it sets a limit to the average wage per employee. No company pays out more in wages per employee than it is generating in value added per employee. The higher the value added per employee, the higher can be the average wage per employee. The creation of value added depends not on the level of capital expenditure but on good marketing strategy, sound investment policy, effective management and employee co-operation to maximize the value added per employee.
VA can be used as a basis for bonus schemes. The conventional bonus incentive schemes which are either based on time or on piece work system have a limitation that they apply only to production workers or individuals or small group of employees. Since a better measure of output is value added, a bonus scheme can link the payroll to value added. This is known as value added based bonus scheme. The technical design of value-added based bonus scheme can vary quite circumstances. The traditional measure of business performance is profitability i.e. a ratio of profit to capital employed. The concept of profitability has some merits but it also has some serious defects. First, as a measure of performance, it can be very misleading. Second, in the modem climate of public opinion, it takes the somewhat narrow view. Third, it cannot be applied to non-profit organizations. Value added is more useful than the profitability ratio.
VA can be used as a measure of business performance.
VA can be used in the formulation of business policies. Value added is used in the formulation of various business policies. It includes (1) product analysis (2) pricing policies (3) capital investment decision, (4) marketing strategy, etc.
Another use of VA is that it links the company’s financial accounts to national income. The sum of the value added by each company will equal national income.
VAS is said to improve the attitude of employees towards their employing company because the value added statements reflect a broader view of the company’s objectives and responsibilities. When fully informed about value-added they should be better motivated to work, be more co-operative and more identified with their company.
Acts as an excellent measure of the size and importance of the company. VAS is used to construct VA based ratios that are considered as important diagnostic and predictive tools for making the comparison of company’s performance with other national and multi-national companies.
At present, both central and state governments use VAS to determine and collect tax on value added by an enterprise in its process of production.
VAS also provides important accounting and other information that facilitates better communication from concerned to a variety of users who are related or unrelated. Thus, it is more transparent in nature.
From the above-mentioned uses of VAS, it is worthwhile to note that an organization may survive without earning profit but cannot survive without adding value. An organization, even if it is sick, especially non-profit making in nature, would remain useful so long as it generates value.
Learn, Explain Value Added Statements: Definition, Advantages, and Disadvantages!
The main thrust of financial accounting development in the recent decades has been in the area of `how’ we measure income rather than `whose’ income we measure. The Concept of Value Added Statements: Meaning of Value Added Statements, Definition of Value Added Statements, Advantages of Value Added Statements, and Limitations or Disadvantages of Value Added Statements! The common belief of the traditional accountants that profit is a reward of the proprietors has been considered as a very narrow definition of income. This was so because previously the assets were assumed to be owned by the proprietor and liabilities were thought as proprietor’s obligations. Also learned, Guide to Theories in Human Resource Management! Value Added Statements: Definition, Advantages, and Disadvantages!
This notion of proprietorship was accepted and practiced so as long as the nature of business did not experience revolutionary changes. However, with the emergence of corporate entities and the legal recognition of the existence of business entities separate from the personal affairs and interest of the owners led to the rejection of the proprietary theory.
Definition: The financial statement which shows how much value (wealth) has been created by an enterprise through utilization of its capacity, capital, manpower, and other resources, and how it is allocated among different stakeholders (employees, lenders, shareholders, government, etc.) in an accounting period.
Value added is now reported in the financial statements of companies in the form of a statement. Value Added Statement (VAS) is aimed at supplementing a new dimension to the existing system of corporate financial accounting and reporting. This is called value-added statement. This statement shows the value created; value added (value generated) and the distribution of it to interest groups viz. Employees, shareholders, promoters of capital and government.
Since VAS represents how the value or wealth created or generated by an entity is shared among different stakeholders, it is significant from the national point of view. ICAI, 1985 has defined Value Added Statement as a statement that reveals the value added by an enterprise which it has been able to generate, and its distribution among those contributing to its generation known as stakeholders.
For the purpose of calculating the amount of value added and its distribution, the value added statement is prepared. The main concern of this statement lies in deriving a measure of wealth (i.e. value), the entity has contributed to the society through the collective efforts of the various stakeholders. This statement is prepared and published voluntarily with the annual financial reports. Thus the presentation of a statement of value-added aids in the disclosure of VA by an enterprise.
The value-added statement may be defined as a statement, which shows the income of the company as an entity and how that is divided between the people who have contributed to its creation.
Assumptions in Value Added Statements:
Following are the basic assumptions which are used for computation of value-added income through the preparation of value-added statements.
VAS is a supplement, not a substitute to P&L account.
The same data which is recorded and processed by the conventional accounting system is used in the preparation of VAS.
The basic accounting concepts and principals of accounting remain the same in preparation of VAS.
It is convenient to prepare Value Added statements from conventional Profit & Loss account. However, there is a lot of difference between these two statements since the income statements contain certain nonvalue-added items e.g. provisions, interests, non-trading profit, and losses, etc.
Objectives of Value Added Statements:
The main objectives of preparing Value Added Statements are:
To indicate the value or wealth created by an enterprise. In a way, it shows the wealth-creating ability of the organization.
To show the manner in which the wealth created is distributed amongst the employees, shareholders and the government. The pattern of distribution of value added can be clearly understood.
To indicate the organization’s contribution to national income.
To use it as a basis for making inter-firm and intra-firm analysis, for preparation of financial plans and targets, for developing productivity linked incentive schemes.
Value Added Statements v/s Profit & Loss Account:
The traditional Profit & Loss Account is prepared on the theory that the company was created by its shareholders and exists for their benefit. However, the traditional accounting system shows only the profits or losses made by a business enterprise and do not provide any information showing the extent to which the wealth is created by a business unit in a given period.
The newly developed accounting method of value added is aiming to add a new dimension to the existing system of corporate financial accounting and reporting through the disclosure of additional information regarding the amount of wealth an entity has created in an accounting period and how it has been divided up by the entity amongst those who have contributed to its creation.
The statement of value-added conceives the company as the corporate entity in which those who provide capital and those who provide labor cooperate to create wealth which they share amongst themselves and with the government. When the value added statement is prepared, then the company is viewed as a `wealth’ producing entity of a number of groups which are known as stockholders.
The value-added statement shows the wealth obtained by its employees, government, providers of capital or business itself during a period of time and the manner in which the generated value is distributed among the employees, government and the providers of capital. It shows the companies contributing to the national income.
The value-added statement is not a substitute, but a supplement to the Profit & Loss Account although it is based on the figures from the latter. The value-added statement is essentially a much simpler statement than the profit statement. The Profit & Loss Account is prepared on the basis of double entry system and its preparation is statutorily compulsory, but the value added statement is not prepared in the statutory account.
Advantages of Value Added Statements:
The following are some of the advantages of Value Added Statements:
Reporting on VA improves the attitude of employees towards their employing companies. This is because the VA statement reflects a broader view of the companies objectives and responsibilities
VA statement makes it easier for the company to introduce a productivity linked bonus scheme for employees based in VA. The employees may be given productivity bonus on the basis of VA/payroll ratio
VA based (e.g. VA/Payroll, taxation/VA, VA/sales, etc.) are useful diagnostic and predictive tools. Trends in VA ratios comparisons with other companies and international comparisons may be useful.
VA provides a very good measure of the size and importance of a company. To use sales figures or capital employed figures as a basis for company ranking can cause distortion. This is because sales may be inflated by large bought-in expenses or a capital-intensive company with a few employees may appear to be more important than a highly skilled labor intensive company
VA statement links a company’s financial accounts to national income. A company’s VA indicates the company’s contribution to national income.
Finally, VA statement is built on the basic conceptual foundation which is currently accepted on the balance sheet and income statements. Concepts such as going concern, matching, consistency, and substance over form are equally applicable to the VA statement.
Criticisms and Limitations or disadvantages of Value Added Statements:
It is argued that although the Value Added statements shows the application of VA to several interest groups (like employees, government, shareholders, etc.), the risk associated with the company is only borne by the shareholders. In other words, employees, government, and outside financers are only interested in getting their share in VA, but, when the company is in trouble the entire risk associated therein is borne only by shareholders. Therefore, the concept of showing value added as applied to several interested groups is being questioned by many academics.
They advocated that since the shareholders are ultimate risk-takers, the residual profit remaining after meeting the obligation of outside interest group should only be shown as value added accruing to the shareholders. However, academics have also admitted that from the overall point of view value-added statement may be shown as the supplementary statement of financial information. But in no case can the VA statement substitute the traditional income statement (i.e. Profit and loss account).
Another contemporary criticism of VA statement is that such statements are non-standardized. However, this practice of non-standardization can be effectively eliminated by bringing out an accounting standard on value added. Therefore, this criticism is a temporary phenomenon.
Thus, along with the advantages, the value added statements embody certain limitations also. These limitations are as follows:
Preparation and presentation of the value-added statement may lead to information overload and confusion, as an ordinary employee reading his company’s corporate annual report may not be able to reconcile the value added statement with the earnings statement.
Another limitation of Value-added statement is that it raises a danger that management may take the maximization of value added as their goal i.e. the inclusion of the value added may wrongly lead management to pursue maximization of firms value.
Another argument against a value-added statement is that its inclusion in the corporate annual report would involve extra work, therefore, extra costs and delay and also a slight loss of confidentiality in view of the additional disclosure involved.
The most severe limitation of value-added data emerges from lack of any uniformity and consistency amongst different companies in the preparation and presentation of Value Added statements. VAS is flagrantly standardized.
Since there are various methods of calculating VA, it is difficult to make inter-firm comparisons. An even intra-firm comparison is not possible if the treatment of these items is changed in the subsequent years.
Value Added statements may lead to confusion especially in the cases where wealth or value added is increasing while earnings are decreasing.
In spite of these limitations, it may be said that the value-added statement brings about certain changes in emphasis rather than the change in the content in the traditional financial statement. Thus it is considered as a valuable means of social disclosure.
Development banks are those which have been set up mainly to provide infrastructure facilities for the industrial growth of the country. The Concept of Development Banks: Meaning of Development Banks, Definition of Development Banks, and Development Banking in India: Definition and Features! They provide financial assistance for both public and private sector industries. Also learned, Commercial Paper, What is Development Banks? Meaning and Definition!
Learn, Explain What is Development Banks? Meaning and Definition!
Meaning of Development Banks:
Development banks are specialized financial institutions. They provide medium and long-term finance to the industrial and agricultural sector. They provide finance to both private and public sector. Development banks are multipurpose financial institutions. They do term lending, investment in securities and other activities. They even promote saving and investment habit in the public.
Definition of Development Banks:
There is no precise definition of the development bank. William Diamond and Shirley Bosky consider industrial finance and development corporations as ‘development banks’ Fundamentally a development bank is a term lending institution.
Development bank is essentially a multi-purpose financial institution with a broad development outlook. A development bank may, thus, be defined as a financial institution concerned with providing all types of financial assistance (medium as well as long-term) to business units, in the form of loans, underwriting, investment and guarantee operations, and promotional activities — economic development in general, and industrial development, in particular. “In short, a development bank is a development-oriented bank.”
The definition of the term ‘development banks’ can be stated as follows:
In General Sense:
“Development banks are those financial institutions whose prime goal (motive) is to finance the primary (basic) needs of the society. Such funding results in the growth and development of the social and economic sectors of the nation. However, needs of the society vary from region to region due to differences were seen in its communal structure, economy and other aspects.”
As per Banking subject (mainly in the Indian context):
“Development banks are financial institutions established to lend (loan) finance (money) on the subsidized interest rate. Such lending is sanctioned to promote and develop important sectors like agriculture, industry, import-export, housing, and allied activities.”
Development Banks in India:
Working capital requirements are provided by commercial banks, indigenous bankers, co-operative banks, money lenders, etc. The money market provides short-term funds which mean working capital requirements.
The long-term requirements of business concerns are provided by industrial banks and the various long-term lending institutions which are created by the government. In India, these long-term lending institutions are collectively referred to as development banks.
They are:
Industrial Finance Corporation of India (IFCI), 1948
Industrial Credit and Investment Corporation of India (ICICI), 1955
Industrial Development of Bank of India (IDBI), 1964
State Finance Corporation (SFC), 1951
Small Industries Development Bank of India (SIDBI), 1990
Export-Import Bank (EXIM)
Small Industries Development Corporation (SIDCO)
National Bank for Agriculture and Rural Development (NABARD).
In addition to these institutions, there are also institutions such as Life Insurance Corporation of India, General Insurance Corporation of India, National Housing Bank, Unit Trust of India, etc., which are providing investment funds.
Development banks in India are classified into the following four groups:
Industrial Development Banks: It includes, for example, Industrial Finance Corporation of India (IFCI), Industrial Development Bank of India (IDBI), and Small Industries Development Bank of India (SIDBI).
Agricultural Development Banks: It includes, for example, National Bank for Agriculture & Rural Development (NABARD).
Export-Import Development Banks: It includes, for example, Export-Import Bank of India (EXIM Bank).
Housing Development Banks: It includes, for example, the National Housing Bank (NHB).
Industrial Finance Corporation of India (IFCI) is the first development bank in India. It started in 1948 to provide finance to medium and large-scale industries in India.
Development Banking in India: Definition and Features!
In the field of industrial finance, the concept of the development bank is of recent origin. In a country like India, the emergence of development banking is a post-independence phenomenon.
In Western countries, however, development banking had a long period of evolution. The origin of development banking may be traced to the establishment of ‘Society General Pour Favoriser I’ lndustrie Nationale’ in Belgium in 1822. But the notable institution was the ‘Credit Mobiliser’ of France, established in 1852, which acted as the industrial financier.
In 1920, Japan established the Industrial Bank of Japan to cater to the financial needs of her industrial development. In the post-war era, the Industrial Development Bank of Canada (1944), the Finance Corporation for Industry Ltd. (FCI) and the Industrial and Commercial Finance Corporation Ltd. (ICFC) of England (1945), etc., were established as modern development banks to provide term loans to industry. In 1966, the U.K. Government set up the Industrial Reorganisation Corporation (IRC). In India, the first development bank called the Industrial Finance Corporation of India was established in 1948.
What is a commercial paper? A commercial paper is an unsecured promissory note issued with a fixed maturity by a company approved by RBI, negotiable by endorsement and delivery, issued in bearer form and issued at such discount on the face value as may be determent by the issuing company. The concept of Commercial Paper: Definition, Features of Commercial Paper, and Advantages of Commercial Paper. Implications of Commercial Paper, Impact on commercial banks, Commercial Paper in India, Future of Commercial Paper in India, Commercial Paper Market in Other Countries, and RBI Guidelines on Commercial Paper Issue. Also learned, Merchant Banking, Commercial Paper: Definition, Features, and Advantages!
Learn, Explain each topic of Commercial Paper: Definition, Features, and Advantages!
Commercial paper is an unsecured and discounted promissory note issued to finance the short-term credit needs of large institutional buyers. Banks, corporations, and foreign governments commonly use this type of funding.
#Definition:
Commercial Paper or CP is defined as a short-term, unsecured money market instrument, issued as a promissory note by big corporations having excellent credit ratings. As the instrument is not backed by collateral, only large firms with considerable financial strength are authorized to issue the instrument.
Why Needed this?
Commercial paper is issued by a wide variety of domestic and foreign firms, including financial companies, banks, and industrial firms. Major investors in the commercial paper include money market mutual funds and commercial bank trust departments. These large institutional investors often prefer the cost savings inherent in using commercial paper instead of traditional bank loans.
#Features of Commercial Paper:
Commercial paper is a short-term money market instrument comprising since promissory note with a fixed maturity.
It is a certificate evidencing an unsecured corporate debt of short-term maturity.
Commercial paper is issued at a discount to face value basis but it can be issued in interest-bearing form.
The issuer promises to pay the buyer some fixed amount on some future period but pledge no assets, only his liquidity and established earning power, to guarantee that promise.
Commercial paper can be issued directly by a company to investors or through banks/merchant banks.
#Advantages of Commercial Paper:
Simplicity:
The advantage of commercial paper lies in its simplicity. It involves hardly any documentation between the issuer and the investor.
Flexibility:
The issuer can issue commercial paper with the maturities tailored to match the cash flow of the company.
Easy To Raise Long-Term Capital:
The companies which are able to raise funds through commercial paper become better known in the financial world and are thereby placed in a more favorable position for rising such long them capital as they may, from time to time, as required. Thus there is an inbuilt incentive for companies to remain financially strong.
High Returns:
The commercial paper provides investors with higher returns than they could get from the banking system.
Movement of Funds:
Commercial paper facilities securitization of loans resulting in the creation of a secondary market for the paper and efficient movement of funds providing cash surplus to cash deficit entities.
#Implications of Commercial Paper:
The issue of commercial paper is an important step in disintermediation bringing a large number of borrowers as well as investors in touch with each other, without the intervention of the banking system as the financial intermediary. Directly from borrowers can get at least 20% of their working capital requirements directly from the market at rates which can be more advantageous than borrowing through a bank.
The forts class borrowers have the prestige of joining the elitist commercial paper club with the approval of CRISIL, the banking system, and the RBI, however, RBI has presently stipulated that the working capital limits of the banks will be reduced to the extent of an issue of commercial paper. Industrialists have already made a plea that the issue of commercial paper should be outside the scheme of bank finance and other guidelines.
Such as, the recommendation of banks and approval of RBI has not accepted the plea at present as commercial paper is an unsecured borrowing and not related to a trade transaction. The main aim of the RBI is to ensure that commercial paper develops a sound money market instrument.si, in the initial stages emphasis should be on the quality rather than quantity.
#Impact on commercial banks:
The impact of the issue of commercial paper on commercial banks would be of two dimensions. One is that banks themselves can invest in commercial paper and show this as the short-term investment. The second aspect is that the banks are likely to lose interest on the working capital loan which has been hitherto lent to the companies, which have now started borrowing through commercial paper.
Further, the larger companies might avail of the cheap funds available in the market during the slack season worsening the bank’s surplus fund position\, but come to the banking system for borrowing during the busy season when funds are costly. This would mean the banks are the losers with a clear impact on profitability.
However, the banks stand to gain by charging the higher interest rate on reinstated portion especially of it done during the busy season and by way of service charge for providing standby facilities and issuing and paying commission. Further, when large borrowers are able to borrow directly from the market, banks will correspondingly be freed from the pressure on resources.
#Impact on the Economy:
The process of disintermediation is taking place in the free economies all over the world. With the introduction of CP financial disintermediation has been gaining momentum in the Indian economy. If CPs are allowed to free play, large companies, as well as banks, would learn to operate in a competitive atmosphere with more efficiently. This result greater excellence in the service of banks as well as management of finance by companies.
Recent Trends:
RBI has liberalized the terms of issues of CP from May 30, 1991.
According to the liberalized terms, the proposal by eligible companies for the issues of CP would not require the approval of RBI.
Such companies would have to submit the proposal to the financing bank which provided working capital facility either as a sole bank or as a leader of the consortium.
The bank, on being satisfied with the compliance of the norms would take the proposal on the record before the issue of commercial paper.
RBI has further relaxed the rules in June 1992,
The minimum working capital limit required by a company to issue CP has been reduced to Rs. 5 crores. The ceiling on the amount of which can be raised through CP has been raised to 75% of working capital.
A closely held company has also been permitted to borrow through CPs provided all the criteria are met. The minimum rating required from CRISIL has been lowered to P2 from 1994 – 95, the standby facility by banks for CP has been abolished.
When CPs are issued, banks will have to effect a pro-rata reduction in the criteria are met. The while minimum rating needed from ICRA is A2 instead of A1.
According to the RBI monetary policy for the second half of 1994 – 95,
The standby facility by banks for CP has been abolished. When CPs are issued, banks will have to effect a pro-rata reduction in the cash credit limit and it will be no longer necessary for banks to restore the cash credit limit to meet the liability on the maturity of CPs. This will import a measure of independence to CP as a money market instrument.
#Commercial Paper in India:
In India, on the recommendations of the Vaghul working Group, the RBI announced on 27th March 1989, that commercial paper will be introduced soon in the Indian money market. The recommendations of the Vaghul Working Group on the introduction of commercial paper in Indian money market areas flowers:
There is a need to have a limited introduction of commercial paper. It should be carefully planned and the eligibility criteria for the issuer should be sufficiently rigorous to ensure that the commercial paper market develops on healthy lines.
Initially, access to the commercial paper market should be registered to rated companies having a net worth of Rs. 5 cores and above with good dividend payment record.
The commercial paper market should function within the overall discipline of CAS. The RBI would have to administer the entry on the market, the amount if each issue the total quantum that can be raised in a year.
Ni restriction is placed on the commercial paper market except by way of the minimum size of the note. The size of the single issue should not be less than Rs. 1 core and the size of each lot should not be less than Rs. 5 lakhs.
The commercial paper should be excluded from the stipulations on insecure advances in the case of banks.
The commercial paper would not be tied to any transaction and the maturity period may be 7 days and above but not exceeding six months, backed up if necessary by a revolving underwriting facility of fewer than three years.
The using company should have a net worth of not less than Rs. 5 cores, a debt quality ratio of not more than 105, current ratio of more than 1033, a debt servicing ratio closer to 2, and be listed on the stock exchange.
The interest rate on commercial paper would be market dominated and the paper could be issued at a discount to face value or could be interest bearing.
The commercial paper should not be subject to stamp duty at the time of issue as well as at the time transfer by endorsement and delivery.
On the recommendations of the Vaghul Working Group, the RBI announced on 27th March 1989 that commercial paper will be introduced soon in the Indian money market. Detailed guidelines were issued in December 1989, through non-Banking companies (acceptance of Deposits through commercial paper) Direction, 1989 and finally, the commercial papers were instructed in India from 1st January 1990.
RBI Guidelines on Commercial Paper Issue:
The important guidelines are:
A company can issue commercial paper only if it has: 1) A tangible net worth of not less than Rs. 10croes as per the latest balance sheet. 2) The minimum current ratio of 1.33:1. 3) A fund based working capital limit of Rs. 25 crores or more. 4) A debt servicing ratio closer to 2. 5) The company is listed on a stock exchange. 6) Subject to CAS discipline. 7) It is classified under Health Code no. 1 by the financing banks, and. 8) The issuing company would need to obtain p1 from CRISIL.
The commercial paper shall be issued in multiples of Rs. 25 lakhs but the minimum amount to be invested by a single investor shall be Rs. 1 crore.
The commercial paper shall be issued for minimum maturity period of 7 days and the maximum period of 6 months from the date of issue. There will be no grace period on maturity.
Another aggregate amount shall not exceed 20% of the issuer’s fund based working capital.
The commercial paper is issued in the form of using promissory notes, negotiable by endorsement and delivery. The rate of discount could be freely determined by the issuing company. The issuing company has to bear all flotation cost, including stamp duty, dealers, fee and credit rating agency fee.
The issue of commercial paper cannot be underwritten or co-opted in any manner. However, commercial banks can provide standby facility for the redemption of the paper on the maturity date.
Investment in the commercial paper can be made by any person or banks or corporate bodies registered or incorporated in India and un-incorporated bodies too. Non-resident Indians can invest in the commercial paper on non-repatriation basis.
The companies issuing commercial paper would be required to ensure that the relevant provisions of the various statutes such as companies Act, 1956, the IT At, 1961 and the Negotiable Instruments Act, 1981 are complied with.
Procedure and Time Frame Doe Issue Commercial Paper:
Application to RBI through financing bank or leader of the consortium bank for working capital facilities together with a certificate from the credit rating agency.
RBI to communicate in writing their decision on the amount of commercial paper to be issued to the lender bank.
The issue of commercial paper to be completed within 2 weeks from the date of approval of RBI through a private placement.
The issue may be spread shall bear the same maturity date.
Issuing company to advise RBI through the bank/leader of the bank, the amount of actual issue of commercial paper within 3 days of completion of the issue.
Future of Commercial Paper in India:
Corporate enterprises requiring burgeoning funds to meet their expanding needs find it easier and cheaper to raise funds from the market by issuing commercial paper. Further, it provides the greater degree of flexibility in business finance to the issui9ng company in as much it can decide the quantum of CP and its maturity on the basis of its future cash flows. CPs have made a good start.
Since the inception of CPs in India in January 1990, 23 companies have issued CPs worth RS. 419.4 crore till June 1991. The total issues amounted to Rs. 9,000 crore in June 1994. The outstanding amount of CPs stood art Rs. 4,770 crore on March 31, 1999, and increased to Rs. 7,814 crore on March 31. 2000.
The issues of CPs declined to Rs. 5,663 crore on March 31, 2000. It shows that the CP market is moribund. There is no increase in issuer base. i.e. the same companies are tapping this market for funds. The secondary market is virtually non-existent. Only commercial banks pick these papers and hold till mortuary. No secondary market is allowed to develop on any significant scale. Further, trading is cumbersome as procedural requirements are onerous.
The stamp duty payable by banks subscribing charged to non-banking entities like primary dealer, corporate and non-banks instead of directly subscribing to them. The structural rigidities such as rating requirements, the timing of issue, terms of issue, maturity ranges denominational rang and interest rate stand in the way of developing the commercial paper market. The removal of stringent conditions and imposing o such regulatory measures justifiable to issues, investors and dealers will improve the potentiality of CP as a source of corporate financing.
Commercial Paper: Definition, Features, and Advantages!
Commercial Paper Market in Other Countries:
The roots of commercial paper can be traced way back to the early nineteenth century when the firms in the USA began selling open market paper as a substitute for bank loan needed for short-term requirements but it developed only in the 1920s. The development of consumer finance companies in the 1920s and the high cost of bank credit resulting from the incidence of compulsory reserve requirements in the 1960s contributed to the popularity of commercial paper in the USA.
Today, the US commercial paper market is the largest in the worlds. The outstanding amount at the end of 1990 in the US commercial paper market stood at $557.8 billion. The commercial paper issues in the US are exempted from the requirement if the issue of prospectus so long as proceeds are used to finance current transitions and the paper’s mortuary is less than 270 days.
Most of the commercial paper market in Europe is modeled on the lines of the US market. In the UK the Sterling Commercial Paper Market was launched in May 1986. In the UK, the borrower must be listed in the stock exchange and he must meet assets of least $50 million. However, rating by credit agencies is not required. The maturities of commercial paper must be between 7 and 364 days. The commercial paper is exempted from stamp duty.
In finance, commercial papers were thought of as a fixable alternative to bank loans. The commercial paper was introduced in December 1985. Commercial paper can be issued only by non-bank French companies and subsidiaries of foreign companies. The papers are in bearer form. It can be either issued by dealers or placed directly.
The maturity ranges from ten days to seven years. Rating by credit agencies is essential. To protect investors. Law contains fairly extensive disclosure requirements and requires publication of regular finance statements by issue. The outstanding amount at the end of 1990 in France Commercial paper market was $31 billion.
The Canadian commercial paper market was launched in the 1950s. The commercial paper is generally used in terms of 30days to 365 days although terms such as overnight are available. The commercial paper issued by Canadian companies is normally secured by the pledge of assets. The outstanding amount at the end of 1990 in the commercial market was $26.8 billion.
In Japan, the yen commercial paper market was opened in November 1987. The commercial paper issues carry maturities from two weeks to nine months. Japan stands second in the commercial paper market in the world an outstanding amount of $117.3 billion in 1990.
In 1980s many other countries launched the commercial paper market, notably Sweden (early 1980s), Spain (1982s), Hong Kong (1982), Singapore (1984), Norway (1984).
IHRM, International Human Resource Management; Many corporations are expanding their markets into regions or other countries they have never touched before. These corporations are experiencing an evolutionary stage: internationalization. It is clear that effective human resource management of an organization is the major competitive advantage and may even be the most important determinant of organizational performance. Thus, to survive in the crucial global economic market, a multinational corporation (MNC) mainly relies on the capability of its international human resource management (IHRM) during the internationalization process. In other words, it is the IHRM’s responsibility to enable the MNCs to be successful globally. Also learn, What are the Financial Intermediaries? Explain IHRM (International Human Resource Management).
Learn, Explain IHRM, International Human Resource Management Definition, Importance, Strategic, Culture, and Dimensions.
What is IHRM? Actually, it is not easy to provide a precise definition of international human resource management (IHRM) because the responsibility of an HR manager in a multinational corporation (MNC) varies from one firm to another. Generally speaking, IHRM is the effective utilization of human resources in a corporation in an international environment. IHRM defines as “the HRM issues and problems arising from the internationalization of business, and the HRM strategies, policies, and practices which firms pursue in response to the internationalization of business”.
The term IHRM has traditionally focused on expatriation. However, IHRM covers a far wider spectrum than expatriation management. Four major activities essentially concerned with IHRM were recruitment and selection, training and development, compensation and repatriation of expatriates.
Definition of IHRM (International Human Resource Management):
Recent definitions concern IHRM with activities of how MNCs manage their geographically decentralized employees to develop their HR resources for competitive advantage, both locally and globally. The role and functions of IHRM, the relationship between subsidiaries and headquarters, and the policies and practices consider in this more strategic approach. IHRM also defines as a collection of policies and practices that a multinational enterprise uses to manage local and non-local employees it has in countries other than their home countries.
Due to the development of globalization, new challenges occur and increase the complexity of managing MNCs. IHRM sees it as a key role to balance the need for coordinating and controlling overseas subsidiaries, and the need to adapt to local environments. Therefore, the definition of IHRM has extended to management localization, international coordination, and the development of global leadership, etc.
To sum up, IHRM should not become a description of fragmented responses to distinctive national problems nor about the ‘copying’ of HRM practices, as many of these practices suit national cultures and institutions. Indeed, issues of concern in IHRM are those of consistency or standardization within diverse social and cultural environments.
Reasons for growing Importance of IHRM (International Human Resource Management):
To explore the field of IHRM, it is important to understand why there is a gradual increase in interest in International Human Resource Management. The Concept of IHRM International Human Resource Management): What is IHRM? Definition of IHRM International Human Resource Management), Reasons for the growing importance of IHRM International Human Resource Management), Strategic International Human Resource Management, IHRM and Culture, Understanding Culture as Layers, Hofstede’s Cultural Dimensions.
IHRM is of great importance at present for a number of reasons:
First importance:
Recent years have witnessed the rapid growth of globalization and international competition. Multinational corporations (MNCs) have increased in number and significance, which contribute to the growing importance of the international role of human resource management.
It has been increasingly recognized that the effectiveness of human resource management is one of the major factors to determine the success or failure of the international business. There is also recognition that the quality of management in international operations seems to be more critical than in domestic operations.
A growing shortage of managers with international exposure and experience is becoming an increasing deficiency that affects a company’s corporate efforts to expand abroad. Meanwhile, the emerging markets require managers with distinctive competence and context-specific knowledge of how to do business successfully in countries that are both culturally and economically distant. Thus, a larger role for IHRM activities in multinational corporations assign.
Second importance:
The failure in the international business arena is often costly both in human and financial terms and proves to be more severe than that in domestic business. Companies need to take precautionary measures to train and compensate human resources. This makes a full-fledged IHRM necessary.
HR strategy plays a significant role in the control and implementation of MNCs. It is not difficult to determine which strategy to pursue an MNC in an internationalizing environment. What challenges is how to implement these strategies to be successful. Developing unique organizational cultures is far more important than structural innovations in any global or transnational strategy. To this extent, IHRM strategy becomes the crucial determinant of the implementation and success of the MNC strategy.
The complex nature of HRM problems involving in the global environment underestimates by some companies. Poor management of human resources often results in business failures in international business. Expatriate performance failure or underperformance continues to be problematic for IHRM in many international corporations.
Strategic International Human Resource Management:
Under the global context, understanding how multinational Corporations (MNCs) can operate more effectively becomes more important than ever. This links an MNC with the need of an internationalized strategy which can direct its subsidiaries’ operation not only in the home country but also in different parts of the world.
There are several reasons to develop IHRM strategy:
at any level, HRM is important to strategy implementation;
major strategic components of multinational enterprises have a major influence on international management issues, functions, and policies and practices;
the attainment of the concerns and goals of MNCs can influence by many of these characteristics of IHRM;
the study of IHRM is challenging and important because there are a wide variety of factors making the relationship between MNCs and IHRM complex.
Major strategic:
Strategic IHRM defines as human resource management issues, functions and policies, and practices that result from the strategic activities of multinational enterprises and that impact the international concerns and goals of those enterprises.
Two major strategic components of MNCs that influence Strategic IHRM point out: inter-unit linkages and internal operations. Regarding inter-unit linkages, multinational enterprises are concerned with how to effectively operate their various worldwide operating units. In particular, the key objectives appear to be how these operating units differentiate and integrate, control, and coordinate.
For strategic IHRM, the issues associated with integrating and coordinating an MNC’s units represent a major influence on strategic IHRM issues, policies, and practices. Concerning internal operations, they require the same attention as the linkage of the units, since they all influence MNC effectiveness. Each unit has to operate as effectively as possible relative to the competitive strategy of the MNC and the unit itself.
It has been argued that the success of strategic IHRM in an MNC largely influence by the quality of its human resources and how effectively the corporation’s employees manage.
Three types Strategic Approach:
Three approaches describe how multinational companies manage the human resources and their overseas subsidiaries: ethnocentric, polycentric, and geocentric.
Ethnocentric Approach: This practice usually happens in the early stage of a firm’s internationalization involvement. With this approach, strategic decisions are all made by the headquarters, and the management practices transfer to the subsidiaries. The most important positions fill by parent-country nationals (PCNs). As a result, little autonomy gives to overseas operating units. During this stage, home country expatriates exercise tight control.
Polycentric Approach: When the strategy becomes polycentric, there is a marked decline in the number of PCNs sending abroad; and, their role changes into communication and coordination of strategic objectives. Host-country nationals (HCNs) recruits to manage the operating units in their own country; because local managers know more about the local circumstances and are more familiar with local business ethics. More autonomy gives to local managers to develop their own management practices appropriate for the subsidiary.
Geocentric Approach: This approach relates most closely to the global or transnational strategy. The selection of employees base on competency rather than nationality. The best headquarter and local practices combine by MNCs to come up with a global-implemented HR strategy.
Most MNCs take the IHRM strategy as a guideline and implement it locally. It is, therefore, the HR managers’ responsibility to provide the proper international HR strategy to prepare; and, manage the employees in their home country or an international assignment.
IHRM and Culture:
Different cultures of various countries and MNCs are one of the most important and difficult challenges to the conduct of IHRM. National and organizational cultures differentiate from one country and firm from those of another. Often these differences clash when companies conduct business in the multinational environment. Cultural differences across countries can influence people in their work environment.
Hofstede defines culture as “the collective programming of the mind which distinguishes the members of one human group from another”. It is important to understand peoples’ different cultural backgrounds to be able to identify the consequences for international management. Culture is a crucial variable in international assignments and should include in international management practices. Knowledge about and competency in working with country and company cultures is the most important issue impacting the success of the international business activity, understanding various values, beliefs, and behaviors of people are essential aspects of success for doing business internationally.
Understanding Culture as Layers:
The multiple layers of meaning of “culture” are one of the complexities that make it so difficult to manage. There are a large number of readily observable characteristics (such as food, art, clothing, greetings, and historical landmarks) that differ obviously from other countries or operations. Sometimes these refer to manifestations of underlying values and assumptions which are much less obvious.
One way to understand this complexity explain by the layers of culture model. The model represents the culture as a series of layers. Moving from outside to inside, each layer represents less and less explicit values and assumptions; while the values and assumptions become more important in determining the attitudes and behaviors. The outermost layer, which calls the surface layer, corresponds to readily visible values and assumptions, like dress, body language, and food.
The middle layer or the hidden culture layer corresponds to religions, values, and philosophies concerning for example what is right and wrong. The invisible layer at the core represents one culture’s universal truths, which is most difficult for foreigners to understand. There exist different cultural dimension among different cultures. These cultural dimensions have been identified and one frequently cited work from a well-known researcher within this cultural dimension field is Geert Hofstede.
Hofstede’s Cultural Dimensions:
Hofstede has identified five cultural dimensions for which each country could be classified in. These five dimensions are power distance, uncertainty avoidance, individualism versus collectivism, masculinity versus femininity, and long-term versus short-term orientation. Power distance indicates the level of inequality in institutions and organizations. A country with large power distance is characterized by formal hierarchies and by subordinates; who have little influence in their own work and where the boss has total authority.
Uncertainty avoidance focuses on the level at which people in a certain country tolerate uncertainty and ambiguity within the society. High uncertainty indicates that the country has a low tolerance for uncertainty and ambiguity. This will inevitably create a rule-oriented society; which institutes laws, regulations, and controls to diminish the amount of uncertainty.
Many things:
Individualism versus collectivism refers to the degree where people prefer to take care of themselves; and, making their own decisions rather than being bound to groups or families. A highly individualistic society consists of usually impersonal and loose relationships between individuals; while a low individualistic society has more tight relationships between individuals, hence referred to as collectivism by Hofstede. The masculinity versus femininity dimension describes if a culture is bound towards values; that is seen as more similar to women’s or men’s values.
Masculinity is characterized by stereotype adjectives such as assertiveness and competitive, while the femininity is characterized by modesty and sensitivity. A high masculinity ranking indicates the country experiences a high degree of gender differences, usually favoring men rather than women. The fifth and last cultural dimension is long-term versus short-term orientation. A long-term oriented society emphasizes on building a future-oriented perspective in contrast to the short-term oriented society which values the present and past.
Explain IHRM (International Human Resource Management)
The present age is the age of industrialization. Large industries are being established in every country. This article explains about Financial Management and their important topics – meaning, definition, features, and scope. It is very necessary to arrange finance for building, plant and working capital, etc. for the established of these industries. How much of capital will require, from what sources this much of finance will collect and how will it invest, is the matter of financial management? Also, read and learn; Merchant Banking, read and share Financial Management in Hindi as well.
Learn, Explain each topic of Financial Management: Definition, Features, and Scope!
It is that managerial activity which concerns with the planning and controlling of the firm’s financial resources. It was a branch of economics until 1890, and as a separate discipline, it is of recent origin. Still, it has no unique body of knowledge of its own and draws heavily on economics for its theoretical concepts even today.
In general financial management is the effective & efficient utilization of financial resources. It means creating balance among financial planning, procurement of funds, profit administration & sources of funds. What is the difference between Cost and Financial Accounting?
Meaning of Financial Management:
They mean planning, organizing, directing and controlling the financial activities such as procurement and utilization of funds of the enterprise. It means applying general management principles to the financial resources of the enterprise.
Definitions of Financial Management:
According to Solomon,
“Financial management is concerned with the efficient use of an important economic resource, namely, capital funds.”
According to J. L. Massie,
“Financial management is the operational activity of a business that is responsible for obtaining and effectively utilizing the funds necessary for efficient operation.”
According to Weston & Brigham,
“Financial management is an area of financial decision making harmonizing individual motives & enterprise goals.”
According to Howard & Upton,
“Financial management is the application of the planning & control functions of the finance function.”
According to J. F. Bradley,
“Financial management is the area of business management devoted to the judicious use of capital & careful selection of sources of capital in order to enable a spending unit to move in the direction of reaching its goals.”
Main Features of Financial Management:
Based on the above definitions, the following are the main characteristics or features of financial management:
Analytical Thinking:
They under, financial problems are analyzing and consider. Study of the trend of actual figures makes and ratio analysis is done.
Continuous Process:
Previously it was required rarely but now the financial manager remains busy throughout the year.
The basis of Managerial Decisions:
All managerial decisions relating to finance take after considering the report prepared by the finance manager. It is the base of managerial decisions.
Maintaining Balance between Risk and Profitability:
Larger the risk in the business larger is the expectation of profits. They maintain the balance between risk and profitability.
Coordination between Process:
There is always coordination between various processed of the business.
Centralized Nature:
It is of a centralized nature. Other activities can decentralize but there is only one department for financial management.
Financial Management: Definition, Features, and Scope.
The Scope of Financial Management:
Financial management, at present, does not confine to raising and allocating funds. The study of financial institutions like stock exchange, capital, market, etc. also emphasizes because they influenced the underwriting of securities & corporate promotion.
Company finance was considered to be the major domain of financial management. The scope of this subject has widened to cover capital structure, dividend policies, profit planning and control, depreciation policies.
The scope of financial management below are as under:
Determining financial needs:
A finance manager supposes to meet the financial needs of the enterprise. For this purpose, he should determine the financial needs of the concern. Funds are needed to meet promotional expenses, fixed and working capital needs. The requirement of fixed assets relates to types of industry.
A manufacturing concern will require more investments in fixed assets than a trading concern. The working capital needs depend upon the scale of operations. Larger the scale of operations, the higher will be the needs for working capital. A wrong assessment of financial needs may jeopardize the survival of a concern.
Choosing the sources of funds:
Several sources may be available for raising funds. A concern may resort to the issue of share capital and debentures. Financial institutions may request to provide long-term funds.
The working capital needs may be met by getting cash credit or overdraft facilities from commercial bands. A finance manager has to be very careful & cautious in approaching different sources.
Financial analysis and interpretation:
The analysis & interpretation of financial statements is an important task of a finance manager. He expects to know about the profitability, liquidity position, short-term and long-term financial position of the concern.
For this purpose, several ratios have to calculate. The interpretation of various ratios is also essential to reach certain conclusions Financial analysis and interpretation has become an important area of financial management.
Cost-volume-profit analysis:
This popularly knows as “CVP relationship”. For this purpose, fixed costs, variable costs, and semi-variable costs have to analyze. Fixed costs are more or less constant for varying sales volumes. Variable costs vary according to the sales volume.
Semi-variable costs are either fixed or variable in the short-term. The financial manager has to ensure that the income of the firm will cover its variable costs, for there is no point in being in business if this not accomplish.
Moreover, a firm will have to generate an adequate income to cover its fixed costs as well. The financial manager has to find out the break-even point that is, the point at which the total costs are matching by total sales or total revenue.
Working capital management:
Working capital refers to that part of the firm’s capital which requires financing’s short-term or current assets such as cash, receivables, and inventories.
It is essential to maintain the proper level of these assets. The finance manager requires to determine the quantum of such assets.
Dividend policy:
The dividend is the reward of the shareholders for investment makes by them in the shares of the company. The investors are interested in earning the maximum return on their investments whereas management wants to retain profits for future financing.
These contradictory aims will have to reconcile in the interests of shareholders and the company. Dividend policy is an important area of financial management because the interest of the shareholders and the needs of the company are directly related to it.
Capital budgeting:
Capital budgeting is the process of making investment decisions in capital expenditures. It is an item of expenditure on the benefits of which are expecting to receive over a period exceeding one year.
It is expenditure for acquiring or improving the fixed assets, the benefits of which are expecting to receive over several years in the future. Capital budgeting decisions are vital to any organization. Any unsound investment decision may prove to be fatal for the very existence of the concern.
With advances in computer technology, one can transfer money instantly, anywhere in the world, you can trade your funds across major stock exchanges online, you can use your credit card across the globe and so on. Lending and borrowing of money are made simple by financial institutions called financial intermediaries. Financial intermediaries such as commercial banks, credit unions, and brokerage funds carry out these transactions on your behalf. A financial intermediary is a financial institution that borrows from savers and lends to individuals or firms that need resources for investment. Also Learned, Functions of RBI, What is the Financial Intermediaries?
Learn, Explain What is the Financial Intermediaries? Meaning and Definition!
The investments made by financial intermediaries can be in loan and/or securities. The basic role of financial intermediaries is transforming financial assets that are less desirable for a large part of the public into another financial asset, which is preferred more by the public. This transformation involves at least four economical functions: providing maturity intermediation, risk reduction via diversifications, reducing the costs of contracting and information processing and providing a payment mechanism.
Without financial intermediation, we must not have seen the revolution in financial services in the past couple of decades. Financial intermediation is responsible for the creation of institutional investors in the financial market. The modern world would not have been so modern without financial intermediaries. Financial intermediation has won savers confidence by protecting their asset while providing efficient services to help manage their asset.
On contrary, with the pool of household savings from savers, they emerged as one large lender who can lend money to businesses and various other borrowers. Financial intermediaries are a vital part of our economic system and they help to maintain the constant flow of money in the economy.
If there were no intermediaries, individual savers would have to directly purchase the securities of borrowers. There would have been incompatibility of the maturity needs of lenders and borrowers since most savers want to lend funds at short maturity, while borrowers want to borrow at longer maturities. It would have been difficult to match small amounts of individual savings to the larger loan amounts desired by borrowers.
This would have cause borrowing more difficult and more tedious. Financial intermediaries perform an important function of maturity intermediation to make an investment from savers and money borrowing for borrowers seamless. Maturity intermediation involves a financial intermediary issuing liabilities against it that have maturity different from the assets it acquires with the fund raised.
An example is a commercial bank that issues the certificate of deposit and invests in assets with a longer maturity than those liabilities. Maturity intermediation offers more choice concerning maturity for their investments to investors and reduces the cost of long-term borrowing for borrowers. Financial intermediaries issue their own debt claims to the saver in forms more attractive to savers, and in turn, lend to borrowers on terms satisfactory to the borrowers.
Financial intermediaries bear risk on behalf of investors by investigating their savings across various sectors of business. They transform risk-by-risk spreading and risk pooling; they can spread risk across a range of institution. In turn, institutions can pool risk by spreading investment across firms and various projects. Diversification allows a financial intermediary to allocate assets and bear risk more efficiently.
Financial intermediaries do risk screening, risk monitoring, and risk evaluation; it is more efficient for an institution to screen investment opportunity on behalf of individuals than for all individuals to screen the risk. It helps individual saver to save time and money and offers the low-risk investment opportunity.
One of the common examples of this function is; a dollar deposited in a checking or savings account, it is not redeemed at less than a dollar but in turn, one get paid interest on it over the period of time. Therefore without financial intermediaries, it would really have been difficult for the individual investor to screen prospect borrower or investment opportunity, which would have discouraged individual savers from lending money and would have affected economical developments.
Financial intermediaries provide a convenient and safe way to store finds and create standardized forms of securities. It also facilitates easy exchange of funds. Due to high volume, it is able to bear transaction and information search cost on behave of savers. Therefore, individual saver enjoys financial services that enable them to deposit and withdraw funds without negotiation whereas borrower avoids having to deal with individual investors.
Since it has information available for both lenders and borrowers, it minimizes information cost for analyzing their data. Without financial intermediaries, lenders and borrowers would have to pay higher transactional and information costs. The modern world would not have been so efficient, aggressive and progressive without financial intermediation.
Merchant Banks is a combination of Banking and consultancy services, Banks Essay, Definition, Nature, Functions, and Characteristics. It provides consultancy to its clients for financial, marketing, managerial and legal matters. Consultancy means providing advice, guidance, and service for a fee. It helps a businessman to start a business. It helps to raise (collect) finance. Also, They help to expand and modernize the business. It helps in the restructuring of business. This helps to revive sick business units. It also helps companies to register, buy and sell shares at the stock exchange. Also learned, Set-Up of Merchant Banking.
Learn, Explain Banks of Merchant Banking: Definition, Nature, and Characteristics.
Definition: Banking can define as a skill-oriented professional service provided by banks to their clients, concerning their financial needs, for adequate consideration, in the form of a fee. The Concept of Merchant Banking is studying and explains – Definition, Nature, Functions, and Characteristics.
Definition of Merchant Banking:
The Notification of the Ministry of Finance defines merchant banker as;
“Any person who is engaged in the business of issue management either by making arrangements regarding selling, buying or subscribing to securities as manager-consultant, adviser or rendering corporate advisory services in relation to such issue management.”
The Amendment Regulation specifies that issue management consists of a prospectus and other information relating to the issue, determining the financial structure, tie-up of financiers, and final allotment and refund of the subscriptions, underwriting, and portfolio management services.
In the words of Skully,
“A Merchant Bank could be best defined as a financial institution conducting money market activities and lending, underwriting and financial advice, and investment services whose organization is characterized by a high proportion of professional staff able to able to approach problems in an innovative manner and to make and implement decisions rapidly.”
Nature of Merchant Banking:
It is skill-based activity and involves serving every financial need of every client. It requires a focused skill-base to provide for the requirements of the client. As well as SEBI has made the quality of manpower one of the criteria for registration as a banker. These skills should not be concentrated in issue management and underwriting alone, which may hurt business.
Merchant bankers can turn to any of the activities mentioned above depending upon resources, such as capital, foreign tie-ups for overseas activities, and skills. The depth and sophistication in the banking business are improving since the avenues for participating in capital market activities have widened from issue management and underwriting to private placement, bought out deals (BODS), buy-back of shares, mergers, and takeovers.
The services of merchant banks cover project counseling, pre-investment activities, feasibility studies, project reports, the design of the capital structure, issue management, underwriting, loan syndication, mobilization of funds from Non-Resident Indians, foreign currency finance, mergers, amalgamation, takeover, venture capital, buyback, and public deposits. Also, A Category-1 banker can undertake issue management only. Separate registration is not necessary to carry on the act as the underwriter; next, we are going to study the functions of banking.
Functions of Merchant Banking Organization:
The following functions of merchant banking below are:
1] Portfolio Management:
Banks provide advisory services to institutional investors, on account of investment decisions. Also, They trade in securities, on behalf of the clients, to provide portfolio management services.
2] Raising funds for clients:
Banking organization assists the clients in raising funds from the domestic and international market, by issuing securities like shares, debentures, etc., which can be deployed for starting a new project or business or expansion activities.
3] Promotional Activities:
One of the most important activities of banking is the promotion of a business enterprise, during its initial stage, right from conceiving the idea of obtaining government approval. There is some organization, which even provides financial and technical assistance to the business enterprise.
4] Loan Syndication:
Loan Syndication means service provided by the bankers, in raising credit from banks and financial institutions, to finance the project cost or working capital of the client’s project, also termed as project finance service.
5] Leasing Services:
Banking organizations render leasing services to their customers. Also, Some banks maintain venture capital funds to help entrepreneurs.
They help in coordinating the operations of intermediaries, concerning the issue of shares like registrar, advertising agency, bankers, underwriters, brokers, printers, and so on. Further, it ensures compliance with the rules and regulations, of the capital market.
Merchant Banking: Definition, Nature, and Characteristics! Image credit from #Pixabay.
Characteristics of Merchant Banking:
They are below as;
The high proportion of decision-makers as a percentage of total staff.
Quick decision process.
Also, The high density of information.
Intense contact with the environment.
Loose organizational structure.
A concentration of short and medium-term engagements.
Emphasis on fee and commission income.
Innovative instead of repetitive operations.
Sophisticated services on a national and international level.
Also, The low rate of profit distribution, and.
High liquidity ratio.
Qualities of a Banker:
Ability to analyze.
Also, Abundant knowledge.
Ability to built up a relationship.
Innovative approach, and.
As well as Integrity.
Merchant Banking in India:
The activity was formally initiated into the Indian capital markets when Grind lays the bank received a license from Reserve Bank in 1967. Grind lays started with the management of capital issues, recognized the needs of the emerging class of entrepreneurs for diverse financial services ranging from production planning and system design to market research.
Even it provides management consulting services to meet the requirements of the small and medium sectors rather than a large sector. Also, Citibank set up its banking division in 1970. The various tasks performed by these divisions namely assisting new entrepreneurs, evaluating new projects, raising funds through borrowing, and issuing equity.
Indian banks started banking services as a part of the multiple services they offer to their clients from 1972. The state bank of India started the banking division in 1972. In the initial years, the SBI’s objective was to render corporate advice and assistance to small and medium entrepreneurs.
Merchant banking activities are of course organized and undertaken in several forms. Commercial banks and foreign development finance institutions have organized them through formation divisions, nationalized banks have formed subsidiaries companies and share brokers and consultancies constituted themselves into public limited companies or registered themselves as private limited companies. Some banking outfits have entered into the collaboration with bankers abroad with several branches.
