Tag: Explanation

  • Free Trade Area, Short Explain, Advantages and Disadvantages in Free Trade

    Free Trade Area, Short Explain, Advantages and Disadvantages in Free Trade

    What is Free Trade? Free trade area is a trade policy that does not restrict imports or exports; it is the idea of the free market as applied to international trade. In government, free trade is predominately advocated by political parties that hold right-wing or liberal economic positions, while economically left-wing political parties generally support protectionism, the opposite of free trade. So, what is the discussing topic; Free Trade Area, Short Explain, Advantages and Disadvantages in Free Trade.

    The Concept of Study; first Free Trade Area, after Short Explain of Free Trade, then discuss Advantages and Disadvantages in Free Trade.

    Free trade: The system in which goods, capital, and labor flow freely between nations, without barriers that could hinder the trade process. Many nations have free trade agreements, like NAFTA (North America Free Trade Agreement, between Canada, the United States, and Mexico) and several international organizations promote free trade between their members. A number of barriers to trade are struck down in a free trade agreement. Taxes, tariffs, and import quotas are all eliminated, as are subsidies, tax breaks, and other forms of support to domestic producers. In the words of Adam Smith: 

    “After all why the protection in needed just to save the gold from going into the other country. I do not give much importance to it. It is a kind of commodity which is less important than other commodities because goods can serve many other purposes besides purchasing money but money can serve many other purposes besides purchasing goods. If protection is levied, it will divert industries from more advantageous trade to less advantageous trade”.

    Free Trade Area (FTA):

    Free trade area is a designated group of countries that have agreed to eliminate tariffs, quotas and preferences on most (if not all) goods and services traded between them. It can be considered the second stage of economic integration. Countries choose this kind of economic integration form if their economic structures are complementary. If they are competitive, they will choose the customs union.

    A group of countries, such as the North American Free Trade Area (Canada, Mexico and the United States), pledged to remove barriers to mutual trade, though not to movements of labor or capital. Each member continues to determine its own commercial relations with non-members so that a free trade area is distinguished from a customs union by the need to prevent the most liberal of its members from providing an open door for imports. This is done by agreeing rules of origin, which set the terms on which goods manufactured outside the area may move from one state to another within it.

    The illustration of a Free Trade Area:

    Unlike a customs union, members of a free trade area do not have the same policies with respect to non-members, meaning different quotas and customs. To avoid evasion (through re-exportation) the countries use the system of certification of origin most commonly called rules of origin, where there is a requirement for the minimum extent of local material inputs and local transformations adding value to the goods. Goods that don’t cover these minimum requirements are not entitled to the special treatment envisioned in the free trade area provisions.

    Cumulation is the relationship between different FTAs regarding the rules of origin sometimes different FTAs supplement each other, in other cases, there is no cross-cumulation between the FTAs. A free trade area is a result of a free trade agreement (a form of trade pact) between two or more countries. Free trade areas and agreements (FTAs) are cascadable to some degree if some countries sign agreement to form free trade area and choose to negotiate together (either as a trade block or as a form of individual members of their FTA) another free trade agreement with some external country (or countries) then the new FTA will consist of the old FTA plus the new country (or countries).

    Within an industrialized country, there are usually few if any significant barriers to the easy exchange of goods and services between parts of that country. For example, there are usually no trade tariffs or import quotas; there are usually no delays as goods pass from one part of the country to another (other than those that distance imposes); there are usually no differences of taxation and regulation. Between countries, on the other hand, many of these barriers to the easy exchange of goods often do occur. It is commonplace for there to be import duties of one kind or another (as goods enter a country) and the levels of sales tax and regulation often vary by country.

    The aim of a free trade area is to so reduce barriers to easy exchange that trade can grow as a result of specialization, the division of labor and most importantly via (the theory and practice of) comparative advantage. The theory of comparative advantage argues that in an unrestricted marketplace (in equilibrium) each source of production will tend to specialize in that activity where it has comparative (rather than absolute) advantage.

    The theory argues that the net result will be an increase in income and ultimately wealth and well-being for everyone in the free trade area. However, the theory refers only to aggregate wealth and says nothing about the distribution of wealth. In fact, there may be significant losers, in particular among the recently protected industries with a comparative disadvantage. The proponent of free trade can, however, retort that the gains of the gainers exceed the losses of the losers.

    Short Explain of Free Trade:

    The commercial policy is concerned with whether a country should adopt the policy of free trade or of protection. If the policy of protection of domestic industries is adopted, the question which is faced whether protection should be granted, through imposing tariffs on imports or through the fixation of quota or through licensing of imports. The commercial policy has been the subject of heated discussion since the time of Adam Smith who advocated for free trade and recommended that tariffs should be removed to avail of the advantages of free trade.

    Even today, economists are divided over this question of commercial policy. Various arguments have been given for and against free trade. If the policy of protection of domestic industries is adopted, the question is whether for this purpose tariffs should be imposed on imports or quantitative restrictions through quota and licensing be applied. The readers should be knowing that a Bharatiya Janata Party in India has been demanding a policy of ‘Swadeshi’ which in essence means that domestic industries should be pro­tected against low-priced imports of goods from abroad, that is, free trade should not be allowed.

    Besides Adam Smith, the other famous classical economist David Ricardo in his famous work “On the Principles of Political Economy and Taxation” also defended free trade to promote effi­ciency and productivity in the economy. Adam Smith and the other earlier economists thought that it pays a country to specialize in the production of those goods it can produce more cheaply than any other country and import those goods it can obtain at less cost or price than it would cost to produce them at home. This means they should specialize according to absolute cost advantage.

    However, Ricardo put forward the ‘Theory of Comparative Cost’ where he demonstrated that to obtain benefits from the trade it is not necessary that countries should produce these goods for which their absolute cost of production is the lowest. He proved that it could pay a country to import a good even though it could produce that good at a lower cost if its cost is relatively lower in the production of some other good.

    Ricardo’s theory of trade rests on the idea of relative efficiency or comparative cost. Despite the classical arguments for free trade to promote efficiency and well-being of the people, various countries have been following the protectionist policies which militate against free trade. By imposing heavy tariff duties on imports of goods or fixing quotas of imports they have prevented free trade to take place between countries. Several arguments have been given in favor of protection. In what follows we spell out this free trade vs. protection controversy.

    Advantages of Free Trade:

    The advocates of free trade put forward the following advantages of free trade:

    • International Specialization: Free trade causes international special­isation as it enables the different countries to produce those goods in which they have a comparative advantage. International trade enables countries to obtain the advantages of specialization. First, a great variety of products may be obtained. If there were no international trade, many countries would have to go without some products. Thus, Iceland would have no coal, Nepal no oil, Spain no gold and Britain no tea. Second, specialization leads to an increase in total production. 
    • Increase in World Production and World Consumption: International trade permits industry to take full advantages of the economies of scale (large-scale production). If certain goods were produced only for the home market, it would not be possible to achieve the full advantage of large-scale production. So, free trade increases the world production and the world consumption of internationally traded goods as every trading country produces only the selected goods at lower costs.
    • Safeguard against the Advent of Monopolies: Thirdly, if there were no international competition, the home market would be so narrow that it would be comparatively easy for the combinations of firms in many indus­tries, e.g., motor cars, paper, and electrical goods, to exercise some control over it. Free trade is often an efficient way of breaking up domestic monopolies.
    • Links with Other Countries: International trade and commercial relations often lead to an interchange of knowledge, ideas and culture between nations. This often produces a better understanding of those countries and leads to amity and theory reduces the possibility of commer­cial rivalry and war.
    • Higher Earnings of the Factors of Production: Furthermore, free trade increases the earnings of all the factors as they are engaged in the production of those goods in which the country has a comparative advantage. It would increase the productivity of each factor.
    • Benefits to Consumers: On account of free trade the consumers of the different countries get the best quality foreign goods, often of a wider range of choice, at low prices.
    • Higher Efficiency and Optimum Utilisation of Resources: Free trade stimulates home producers, who face foreign competition, to put forth their best effort and thus increase managerial efficiency. Again, as under free trade, each country produces those goods in which it has the best advantages, the resources (both human and material) of each country are utilized in the best possible manner.
    • Evil Effects of Protection: Free trade is also advocated because it can remove the evil effects of protection, such as high prices, the growth of monop­olies, etc. It is also immune from such abuses as ‘corruption and bribery’ and the creation of vested interests which often arise under a protectionist system.
    • If the policy of free trade is adopted by all the countries of the world, it promotes a mutually profitable international division of labor which leads to specialization in the production of those commodities in which they have the greatest relative advantage. The diversification of human and material resources of the country into remunerative channels results in increasing the real national product of all the countries. The standard of living of people all over the world goes up.
    • Free trade is undoubtedly the best from the point of view of the consumers because they can get a wider range of goods and commodities at lower prices. When protection is levied, the choice is reduced and the prices of commodities go up.

    Disadvantages of Free Trade:

    But, free trade is opposed on several grounds. The following Disadvantages of Free Trade below are:

    • Excessive Dependence: As a country depends too much on foreign countries, an outbreak of war may upset its economy. During the 1991 Gulf War America refused to sell its products to its enemies.
    • Obstacles to the Development of Home Industries: If foreign goods are imported freely, the domestic industries of the developing countries would not be able to develop rapidly due to the superior strength of foreign industries.
    • Empire-Builder: Under free trade, the foreign traders particularly the dominant ones may try to become empire-builders in the future. In the past, free trade gave rise to colonialism and imperialism.
    • Import of Expensive Harmful Goods: A country may also import expensive and harmful foreign goods.
    • Rivalry and Friction: Finally, free trade sometimes creates rivalry and frictions among the trading nations. In other words, commercial rivalries resulting from trade often lead to war. This is an important point.
    • One of the most captivating arguments put forth against free trade is that it leads to over-dependence upon other countries. In the time of war or any other emergency, the over-specialized countries may not be able to supply the required goods to the non-specialized ones.
    • It is pointed out that under the system of free trade, the economically backward country remains always at a disadvantage with the economically advanced country. So in order to build up industries, the backward nations must erect tariff walls the USA. and Germany in the late 19th century abandoned free trade because they were late in entering the industrial field. They developed the industries behind tariff barriers. So is also the case with India.
    Free Trade Area Short Explain Advantages and Disadvantages in Free Trade
    Free Trade Area, Short Explain, Advantages and Disadvantages in Free Trade. Image credit from #Pixabay.
  • What does mean Business Continuity Management (BCM)?

    What does mean Business Continuity Management (BCM)?

    Business continuity management is not just about having systems in place for backups and to fall back on. There needs to be a mindset change in the employees who operate these systems and hence; what needs is the ability to switch to the backup system or the offshore site and resume operations within no time. What is Business Continuity? Business continuity (BC) defines as the capability of the organization to continue the delivery of products or services at acceptable predefined levels following a disruptive incident. So, what is the question; What does mean BCM? Explanation.

    The Concept of Business Continuity Management (BCM) Explanation with Meaning and Definition.

    The entire business around the world exposes to risk or disruptions; whether it is from fire, equipment failure, natural disaster, communication failure, economic downturn, or an act of terrorism. There can be hardly a superior hazard to any organization than the recession. The organizations experienced more disruptions than ever in the past years. These disruptions can ruin the organizations or make it difficult to survive. This is where Business Continuity Management (BCM) plays an integral role to smoothly run the business without any interruption.

    It is very important for the endurance of the business. It is a method design to ensure that the functions of an organization can manage or restore promptly in the event of an internal or external occurrence. One of the most important objectives of the BCM is to reduce the legal, financial and reputational; damage of these events which results, an increase in the profitability of a business.

    Definition of Business Continuity Management:

    We all need the support services that we often take for granted to be available to us 24/7 and whenever needed. Right from the telephone that we use to the internet connection; any downtime that this service faces view unfavorably by us. But, given the uncertainties of the 21st century where a minor dislocation somewhere can have a cascading effect on the infrastructure, there is a need for BCM.

    “The holistic management process that identifies potential threats to an organization and the impacts to business operations those threats; if realized, might cause, and which provides a framework for building organizational resilience with the capability of an effective response; that safeguards the interests of its key stakeholders, reputation, brand, and value-creating activities.”

    Simply put, the term denotes the recovery of the business or the service from an outage or disruption. The rapidity with which the service restore depends on how well the business continuity was planned for and managed during the downtime and subsequent recovery. They have been at the forefront of corporate planning in recent years; because of the interconnected and integrated global economy where one outage to one service threatens the whole chain involved.

    “An ounce of prevention is worth a pound of Cure” – Benjamin Franklin.
    “It’s difficult to make predictions, especially about the future.” – Yogi Berra.

    Other things;

    Business continuity management (BCM) refers to the management of core conceptual resources; that address future threats to a business and help business leaders handle the impacts of these threats. This term is in the same vein as others, like business continuity planning (BCP); where business leaders try to identify and address potential crises before they occur.

    It defines as a holistic management process that identifies potential impacts; that threaten an organization and provides a framework for building resilience; with the capability for an effective response that safeguards the interests of its stakeholders, reputation, brand, and value-creating activities.

    The Theory of Business Continuity Management explain below;

    In theory, They replicates crisis management to a great extent; which has grown rapidly over the past decades, with the main aim of eliminating the focus of social and technological problems. Crisis management approach and Information systems (IS) defense is the foundation of BCM. The evolution of BCM started in the 1970s, identifying the main 3 stages of growth. The first stage, “technology mindset” during the 1970s was limited to the protection of corporate mainframe computers. After the advent of personal computers to end-users in the 1980s leading to the vast quantity of computer users in organizations, resulted from a rise in the number of transactions, compliance became regulation and legal requirement. This second stage was identified as the “auditing mindset”.

    The final stage “value mindset” in the 1990s became more focused on the requirements of the business; where BCM can act to add value to the organizations. At this time of moment, the BCM approach became more efficient by including improved protection for the whole organization, customers & suppliers, social and technical processes. The technology and auditing mindset was limited to the protection of IT. Due to the increased use of technology over the past decade organizations are more dependent on it; which brings about a new risk for the business.

    Theory part 01;

    Some of the businesses completely rely on IT and operates day and night. A very small interruption can cause considerable loss of revenue and customer which results in damage to business reputation. 25% of Companies who faced IT crisis from 2 to 6 days went bankrupt immediately whereas 93% of the companies filed for bankruptcy in a year that lost their core data for 10 days. In this escalating global business world and the integration of various economies generates fresh challenges; that have encouraged the development of BCM. The recent recession has had more influence over outsourcing to save the production and labor cost.

    Supply chain risk is greater than ever as new risks are coming from international economies. Companies like GAP and Nike found that these can have a poor impact on the reputation of the company. A little loss or delay from a single supplier can have a bad effect on the organization. BCM plays an important role to manage supply chain disruptions, it also adds to the development of BCM. Extreme weather and climate change are seen to be affecting the growing organization’s operations.

    Theory part 02;

    Major events in the past for instance September 11, 2001, World Trade Centre terrorist attack; July London buses and underground terrorist attack, the 2000 energy crisis, pandemic flu more recently swine flu; and, natural disasters like Tsunami, latest in Japan, all these events have a major influence on the development of BCM and created more importance for the organizations to have a business continuity plan in place to avoid all the problems and disruptions caused by the upcoming unknown events.

    IT, globalization, supply chain, climate and weather, terrorism, pandemic are growing disruptions organizations facing day by day. These risks link together; the crisis in one part may spread in various directions. BCM is extremely essential for the maintenance of the products and services while protecting the reputation of the business. BCM seeks the survival and profitability of the organization when disruption occurs. Improves the resilience capacity of the business against disruption; also recover from unexpected events. No doubt Business Continuity Management has started in terms of compliance; while protecting Information Systems (IS), now has developed to avoid various short; and long-term disruptions and adds value to the organizations. There are many drivers forcing reasons why an organization should have BCM in place.

    Theory part 03;

    Organizational reputation is the strategic asset of the company. Managing risk related to it, for example, negative news, bad feedback from customers, making financial losses, late payments, increasing stakeholder demands; has become the major driver for BCM. Furthermore,e it has developed into the main concern for most organizations. Non-timely wrong decisions, lack of communication after the crisis occurs can lead to financial and reputation damage to any organization. BCM does not limit to fight against disruption, it also makes positive effective communication; and, how to handle the crisis to minimize the damage caused by the crisis.

    Financial and reputational damage directly associate with customers; while coping with the recession, it is very essential to retain the existing customers; and attract new customers besides meeting the needs of customers in a positive environment. Truly understanding the customer’s needs and mindset is paramount. Insurance provides the organization the comfort by transferring the risk, being able to repair or replace; the items in the event of loss or damage caused by the insured peril. Business Interruption (BI) Insurance covers loss in the profit for a limited period of time after the incident. It provides some cover for the financial loss but doesn’t cover the loss of reputation, loss of customers, loss of business, and loss of employee loyalty.

    Theory part 04;

    Moreover, BI cover limit to excess where losses incurred during; those excess periods of time not cover whereas BCM would prevent the losses incurred or minimize the impact incident occurred. Competitive advantage is another factor that drives Business Continuity Management. To win the confidence of customers and suppliers, the organizations should be able to prove; that they have appropriate BCM in place by ensuring a tested business continuity plan. It improves customer trust and brand reputation by creating a competitive advantage. The organizations that have BCM in place the leading responsibility remains with the senior management and board.

    Although the organizations that have specific BCM departments tend to be rising. Uncertainty lies in the future; with the rise in various natural disasters like Tsunami, terrorist attacks, etc ‘Business continuity management has become inevitable. They help businesses go through these difficult times making sure of their survival in the market. BCM however, like all other good things also has its dark sides; which without appropriate considerations can lead to a complete failure. Some of the issues that may face BCM include financial issues; where the majority of the company doesn’t have sufficient resources to have a business continuity management in place.

    Theory part 05;

    It also requires human resources to make sure of its success; which might also be not available to the organization but as the environment in which organizations conduct their operation is highly dynamic to ensure that necessary actions should take to make sure that the organization has the resources for BCM to make sure of its survival in times of incidents. Moreover, as It is highly demanding with certain needs in terms of resources most of the senior managers tend to retrieve from it but its importance has been seen in the last few years where companies were swallowed by the giant recession that the world faced and is still recovering from.

    Hence measures should take and their importance should alarm the management of organizations. Apart from resources and management, BCM also threatens by the fact the there might be over-analysis of business. The analysis should perform in the part of the business that is important or is directly related to BCM rather than analyzing the non-relevant part of the business. This can assure by making allowing the head of the BCM project to decide the part of the business that has to analyze. Another factor that might lead to failure of Business Continuity Management is too much attention to risk; which can lead to hindrance in the way of the project and the manager’s will to paralyze the project to save themselves from risk.

    Theory part 06;

    Analysis of risk is, however, important to make sure of the success; but, when over-done it tends to cause hindrance rather than motivating the success of the project. Therefore, an accurate amount of risk analysis should perform by the organization. It is usually making too complex and time-consuming; which is another factor that causes hindrance whereas a good BCM practice will be easy, flexible, and less time-consuming. One of the biggest hindrances along with resources in BCM is the belief where most of the organization believes; that they don’t require one or they might be never hit by a disaster.

    However, BCM is not only meant for disaster it might come in any face i.e. terrorist attacks, power or system failure, etc. Therefore, every organization irrespective of its size needs to have a BCM so that there is always a business continuity plan in times of crisis. The investment in business continuity is worthy; because of the value, it adds to the organization in a particular competitive advantage. On the other hand, the world economic crisis has a key impact on business continuity management. If we think we will die tomorrow then we will not do anything the same is the case with BCM. If organizations assume that they will shut down the business due to the financial and economic slump that avoids the concept of business continuity completely.

    Theory part 07;

    The concept of having BCM in place has been misunderstood in some cases. The likelihood of BCM to be effective in times of disruption depends on if a company has a business continuity plan whereas companies without business continuity are unable to survive. In short BCM act as a helping tool for organizations whether in times of recession or minor interruption. It is therefore complementary to the process of risk management; which analyzes the risk exposure and possible consequences of these risks to the business. It doesn’t just focus on the disruptions but also brings out the key improvements for the product and services required for the survival of the business.

    However, with the help of BCM, all the businesses can fight throw recession if implemented appropriately. In addition, it assists in understanding the functions of organizations closely and deeply to enhance the performance and profitability; while protecting and enhancing the reputation and brand value.

    Theory part 08;

    The most challenging phase is implementing Business Continuity Management in the organization. Serious difficulties face by managers while dealing with employees, customers, and suppliers. Their practice is new and becoming more common. Communication plays the chief role in the BCM implementation process.

    Possibly it should involve all levels of the organization so everyone should be aware of identifying the main threats and try to eliminate them. The continuity plan must test and maintain at all times to ensure it works when the incident occurs. The need for BCM is more than ever mostly in times of recession as it acts as a useful tool for saving cost while improving the financial state of the business. Organizations exercise BCM to protect their brand, reputation, people, and bottom line. In addition, it provides the foundation for attracting new customers. BCM is a great asset in times of recession. It must understand that BCM not only adds value by preventing disruptions but also recover quickly from the incident that occurred.

    What does mean Business Continuity Management (BCM) Explanation
    What does mean Business Continuity Management (BCM)? Explanation.
  • Financial Statements Analysis and Explanation of Accounting

    Financial Statements Analysis and Explanation of Accounting

    Financial Statements Analysis and Explanation; What is Analysis? An analysis is a process of breaking a complex topic or substance into smaller parts to gain a better understanding of it. Financial statements are prepared primarily for decision making. The statements are not an end in themselves but are useful in decision making. Financial analysis is the process of determining the significant operating and financial characteristics of a firm from accounting data. The profit and Loss Account and Balance Sheet are indicators of two significant factors-Profitability and Financial Soundness. Analysis of statement means such a treatment of the information contained in the two statements as to afford a full diagnosis of the profitability and financial position of the firm concerned.

    The concept of Cost Accounting explains Analysis and their Explanation of Financial Statements.

    Financial statement analysis is largely a study of the relationship among the various financial factors in a business as disclosed by a single set of statements and a study of the trends of these factors as shown in a series of statements. This post we will discuss the analysis and interpretation of financial statements of a company.

    The main function of financial analysis is the pinpointing of the strength and weaknesses of a business undertaking by regrouping and analysis of figures contained in the financial statements, by making comparisons of various components and by examining their content. The financial statements are the best media of documenting the results of managerial efforts to the owners of the business, its employees, its customers and the public at large, and thus become excellent tools of public relations. The following topic of the analysis and explanation of the financial statements is below are;

    Analysis of Financial Statements:

    Analysis includes:

    • Breaking financial statements into simpler ones.
    • Regrouping.
    • Rearranging the figures given in financial statements, and.
    • Finding out ratios and percentages.

    Thus all processes which help in drawing certain results from the financial statements are included in the analysis. The data provided in the financial statements should methodically classify and compare with figures of the previous period or other similar firms. Thereafter, the significance of the figures is establishing. The work of an accountant in analyzing financial statements is the same as that of a pathologist, who takes a drop of blood and analyses it to point out its various components and gives a report based on his analysis.

    Similarly:

    An accountant makes an analysis of each item appearing in financial statements and then reports based on his analysis. The analysis only establishes a relationship between various amounts mentioned in the Balance Sheet and Profit and Loss Account. After analyzing the financial statements, the next step is to use the mind for forming an opinion about the enterprise. This is the interpretation stage. The technique is called “Analysis and Interpretation” of financial statements.

    The analysis consists of breaking down a complex set of facts or figures into simple elements. Interpretation, on the other hand, consists of explaining the real significance of these simplified statements. Interpretation includes both analysis and criticism. To interpret means to put the meaning of statement into simple terms for the benefit of a person. Interpretation is to explain in such a simple language the financial position and earning capacity of the company which may understand even by a layman, who does not know to account. The analysis and interpretation of financial statements require a comprehensive and intelligent understanding of their nature and limitations as well as the determination of the monetary valuation of the items.

    The analyst must grasp what represent sound and unsound relationship reflected by the financial statements. Interpretation is impossible without analysis. “Interpretation is not possible without analysis and interpretation analysis has no value”. Analysis and interpretation act as a bridge between the art of recording and reporting financial information and the act of using this information. Analysis refers to the process of fact-finding and breaking down the complex set of figures into simple components while interpretation stands for explaining the real significance of these simplified components. Interpretation is a mental process based on analysis and criticism.

    Points:

    George O May points out the following uses of financial statements:

    • Report on stewardship.
    • The basis for fiscal policy.
    • Determine the legality of dividends.
    • A guide to advise dividend action.
    • The basis for granting of credit.
    • Informative for prospective investors in an enterprise.
    • The guide to the value of investment already made.
    • An aid to Government supervision.
    • The basis for price or rate regulation, and.
    • A basis for taxation.

    A financial analyst can adopt the following tools for analysis of the financial statements:

    • Comparative Financial Statements.
    • Common Size Statements.
    • Trend Ratios or Trend Analysis.
    • Statement of Changes in Working Capital.
    • Fund Flow and Cash Flow Analysis, and.
    • Ratio Analysis.

    Procedure for Interpretation:

    • Ascertain the purpose and the extent of analysis and interpretation.
    • Study the available data contained in financial statements.
    • Get additional information, if needed.
    • Arrange the data in a useful manner.
    • Prepare comparative statements, ratios, etc.
    • Interpret the facts revealed by the analysis.
    • The interpretation drawn from the analysis is presented.
    Objectives of Analysis and Interpretation:

    The following are the main objectives of analysis and interpretation of financial statements:

    • To estimate the earning capacity of the firm.
    • To assess the financial position of the firm.
    • Decide about the prospects of the firm.
    • To know the progress of the firm.
    • To judge the solvency of the firm.
    • Measure the efficiency of operations.
    • Determine the debt capacity of the firm.
    • To assess the financial performance of the firm.
    • To have a comparative study.
    • Help in making plans.

    Analysis of financial statements should always tune to the objective. People use financial statements for satisfying their particular curiosity. Financial accounts are interpreted by different persons in different ways according to their objects. For instance, the same financial statement may be very good for one; ordinarily good for the other and worst for the third. This is because of their views and objects of interpretation differ.

    For instances:
    • A prospective shareholder would like to know whether the business is profitable and is progressing on sound lines.
    • A supplier who would like to transact business with the firms may interest in the company’s ability to honor its short-term commitments.
    • A financier would like to satisfy the safety and reliability of the return on his investment. Thus, the object of the analysis determines the extent, depth, and nature of the analysis.

    Financial Statement Analysis:

    Financial performance, as a part of financial management, is the main indicator of the success or failure of the companies. The performance analysis can consider as the heart of the financial decisions. Also, Rational evaluation of the performance of the companies is essential to prepare sound financial policies and to attract potential investors. Shareholders are interested in EPS, dividend, net worth and market value per share. Management is interested in all aspects of financial performance to adopt a good financial management system and for the internal control of the company.

    The creditors are primarily interested in the liquidity of the company. The government is interested in the regulatory point of view. Besides, other stakeholders such as economists, trade associations, competitors, etc are also interested in the financial performance of the company. Therefore, all the stakeholders are interested in the performance of the companies but their perspective may be different. Financial statement analysis helps to highlight the financial performance of the company. It is the process of identifying the financial strength and weakness of a firm by properly establishing the relationship between the items on the Balance Sheet and those on the Profit and Loss Account.

    Extra Notes:

    It is a general term referring to the process of extracting and studying information in financial statements for use in management decision making, for example, financial statement analysis typically involves the use of ratios, comparison with prior periods and budget, and other such procedures. The financial appraisal is a scientific evaluation of the profitability and strength of any business concerns.

    It seeks to spotlight the significant impacts and relationships concerning managerial performance, corporate efficiency, financial strength and weakness and creditworthiness of the company. The objective of financial statement analysis is a detailed cause and effect study of the profitability and financial position. Also, Financial Analysis is the process of determining the significant operating and financial characteristics of a firm from accounting data and financial statements.

    The goal of such analysis is to determine the efficiency and performance of the firm’s management, as reflected in the financial records and reports. Financial statements are such records and reports, which contain the data required for performance management. As well as, it is therefore important to analyze the financial statements to identify the strengths and weaknesses of the company.

    Financial Statements Analysis and Explanation of Accounting
    Financial Statements Analysis and Explanation of Accounting, Image credit from #Pixabay.

  • L’Oréal Global Branding Strategy explains What? their Case Study

    L’Oréal Global Branding Strategy explains What? their Case Study

    L’Oréal Global Branding Strategy; The L’Oréal group has been the market leader of cosmetics and the beauty industry. The products it mainly sells are in the fields of cosmetics including, hair color, makeup products, skincare products, perfumes, etc. Poster presentation on L’oreal Luxury Cosmetic; The company has also launched several products in the field of dermatology and pharmacy. The sales and profits maintain through its wide range of professional consumer luxury; and, active products showing a strong through it. So, what discusses is: L’Oréal Global Branding Strategy explains What? their Case Study.

    The Concept of the study explains the Case Study of L’Oréal Global Branding Strategy.

    It was founded in 1909 by Eugene Schueller and soon it grew into the world’s largest company in the industry. The turnover of the company has grown over 19 billion euros with over 11 percent of growth; which considerably indicates the success of marketing strategies of the L’Oréal group. The company market over 70 international brands along with several local brands made specifically for the country it is marketing with the same international standards; and, flexibility according to the local needs and requirements that are to sell to both men and women in over 150 countries.

    The company has shown enough growth in the continents of North America and Western Europe with its outstanding performance of twice the market trend growth of the markets of Asia Pacific, Eastern Europe, Latin America, Africa, and the Middle East. The global marketing efforts of the company with its smart selling efforts brought a tremendous amount of success for it. The differences between the different cultures and the needs of the native people of those different cultures have been quite successfully understood by the company’s marketing personals.

    Explain 01:

    To understand and to answer the cosmetic requirement of the different types of people in the world the company has set up its five worldwide research; and, development center which establishes in different continents like 2 in France, 1 in the US, and 1 in Japan and 1 in China, to make the manufacturing of the product; managed according to the needs of a different culture. L’Oréal group has successfully projected itself as a nice example of a good multinational corporation that manages its profit with considerable success through the competitions in the market’s surrounded by the various geographical, social, economic, and cultural risks.

    The company reached out to a variety of customers with different economic status and cultural background in overall different perception through its fine global branding strategies. Through its selling of different products, the company sold different genres of products like Italian elegance, New York street smarts, French beauty, etc through different global branding methods.

    L’Oréal’s global branding strategy that’s doing wonders has been actively spearheaded by Owen Jones himself. Lindsey Owen Jones has been the CEO of L’Oréal for nearly two decades and an “Honorary President” now, and under his leadership; L’Oréal has really fine-tuned its global branding strategy. Interestingly some press reports tell us that he has been seen roaming around streets in foreign markets to understand the new and existing trends.

    Explain 02:

    And without any doubt, his interesting work style seems to work wonders. The branding strategy of L’Oréal has such an impact that L’Oréal seems to be the only global leader in every segment of the cosmetics industry; the right positioning of its products seems to be the key. Whatever it is trying to sell the French elegance or street smartness of America; is getting good response throughout the world and L’Oréal has been able to reach its consumers across the national and cultural boundaries.  Owen Jones says: “We have this great strategy back in the head office of how we are going to do it worldwide.

    But when you go out and look at what is happening, is there a big gap between your projections and the reality of what you see and hear? It is so important to have a world vision because otherwise decentralized consumer goods companies with many brands can fracture into as many little parts if somebody isn’t pulling it back the other way the whole time with a central vision.” This really explains why he prefers roaming in the streets for his strategy-making rather than sitting in the boardroom. Having said all that it’s quite evident that the global branding strategy of L’Oréal has paid huge dividends to the company overall.

    Explain 03:

    To understand this splendid growth story, we need to see how exactly L’Oréal applied their strategy to the countries that were entirely distinct as far as the lifestyle, spending pattern, and culture concern. L’Oréal was started in France, has a good brand value in the united states of America, is reaping good dividends from India, and has a remarkable presence in Japan. These are different complex societies with different needs; so how exactly L’Oréal managed to be equally successful in all these places? This question needs some fact-finding to be done based on country-specific products; and, strategies adopted by the cosmetics conglomerate.

    That’s what exactly we will try doing in the next section of this case study. In India, 4 billion 7.5 ml sachets sell every year and that’s a staggering 66% of total shampoo consumption in India. Most of the urban Indian women (96%) use shampoo, however only 46% use foundation. For hair care, a huge 74% population of Indian women still rely on home remedies, 42% use henna, and 94% use hair oil, as far as L’Oréal’s sale per person in India concern is just 10 cents compared to 28 Euros per person in France. In India skin lightening creams (fairness creams) constitute more than 50% of the skincare market people seem to be crazy about getting fairer.

    Explain 04:

    These facts are self-explanatory about the nature of the Indian market; and, it’s clearly stating that the strategy used in the USA or any other European countries is not going to work in India. the USA is a mature market as far as cosmetics consumption concerns India is an emerging economy with most of the population below 35 years of age and a huge aspiring middle class. The cosmetics market is growing approximately at an annual rate of 16% in India, still a long way to go. The youth in urban centers very concern about the image but the larger section is still off the fashion map.

    Interestingly even after the success story of corporate India, apparently it’s still a country that is very much community-oriented. The great Indian middle class is aspiring but still has the community-driven cultural values intact. L’Oréal has taken this fact very much into consideration while preparing the marketing strategy for India. A very good example would be the launch of Garnier Fructis shampoo in India. The concept was to rely on the idea rather than relying on advertising a brand. The idea of getting five times stronger hair was the central point that created the hype, through “word of mouth” or network marketing.

    Initially, it was positioned as a product for young and teenagers; once the product was established in the market it tried to change or rather increase the target base by shifting gears. In a recent advertisement for Garnier hair color, a daughter is shown advising her mother to try the Garnier product and explaining the benefits. Again it relies on the concept of the idea getting spread by “word of mouth” to another customer segment. This is the best example of marketing in a closed &community driven society.

    Explain 05:

    There is one more remarkable thing about this entire campaign the catchline “take care”. It shifts the focus from the product to the core value of Indian society “caring about others”; and, the entire advertisement becomes more of good advice rather than publicity. China is the world’s most populated country in the world and that makes it very clear that it has the potential of being the biggest consumer market. These days Chinese women are spending an average of 10 to 15% of their income on cosmetics products, and urban Chinese ladies would use 2.2 cosmetics products on average every morning.

    Evidently, most of them want to be fashionable and the L’Oréal punch line – ‘if you want to be fashionable, just choose Maybelline’, really seems to work. Masses are made to believe that this is something that represents America and it ought to be trendy. Maybelline is the product line for the masses and L’Oréal really uses the tendency of masses to look towards the USA that’s why the Maybelline products display against the backdrop of the shiny skyline of New York City Chinese women prefer skincare and beauty products.

    Explain 06:

    According to research by L’Oréal in China, women concern about the radiance of their skin; and, prefer skin nourishing lotions that protect their skin from skin-drying winters. Unlike us customers most Chinese women like skin whiteners rather than tanning products. It’s a sign of beauty for Chinese women. Also, the texture of Chinese hair is thicker and more course than typical US Caucasian hair. This requires different products, and really different skill set to effectively sell and get these products moving in China.

    L’Oréal has dedicated research facilities for these and other issues and followed up with more innovations to suit the needs and preferences of Chinese consumers. There is one more very interesting fact about the Chinese cosmetics industry; Chinese women are very concerned about the ingesting of lipsticks. This is the most interesting food attitude about Chinese women.

    Now following its global strategy L’Oréal even considered this and developed lipsticks containing vitamins; as soon as this was told to the women they were more comfortable in using the product. European countries are mostly developed, here L’Oréal has the liberty of publicizing the brand value rather than focusing on pricing, the benefit to L’Oréal in these markets is that it already well establish and the brand well knows so it can concentrate on grabbing the attention of individualistic feminist women.

    Explain 07:

    Pricing is not a concern in these markets so L’Oréal can afford to have punchlines like-“I am worth it” because these punchlines justify the high pricing of the products and fulfill the feeling of exclusivity of high-end clientele. Now let’s take another example from the European and our markets, L’Oréal brands in these markets are quite well established. L’Oréal products have been used there for few generations now; once young consumer of the L’Oréal brand has started aging and the same street-smart products could not position to them, they have started becoming the mature citizens; now their priorities have changed.

    A recent market report suggests that the new target segment in the cosmetics industry is 40 plus women who once used teenage cosmetics products. The thrust is on anti-aging products because it not only adds the new customer base but retains the once teenage customer also. The customer from the baby boom generation reaches the retirement age and tries to maintain a healthy and youthful look and finds out that their favorite cosmetics brand is still making products for them. L’Oréal capitalized on their desire to look youthful and started marketing its anti-aging products, it has signed sixty-year-old Diane Keaton to represent the Age Perfect Pro-Calcium skincare line.

    Explain 08:

    Also, L’Oréal has signed Scarlett Johansson, Penelope Cruz, Eva Longoria, and Beyoncé Knowles to promote specific cosmetics lines according to the age groups. Now this tells us how L’Oréal used the desire of customers to position its products. The French conglomerate believes that only two different cultures as far as fashion concerns are dominant, represent by two flagship brands L’Oréal Paris and Maybelline New York. L’Oréal has been projected as a French origin with elegance, high-end presentation, and obviously high pricing.

    Whereas the Maybelline product line represents the street-smart American babe who is looking for the value of the money. America seems to be the growth engine of the world, in the cosmetics industry as well. L’Oréal has understood this and they made a strategy based on the trends in the USA and that’s how Maybelline came into existence. Maybelline currently is the second-largest brand in the share of unit sales of cosmetics products and number one in makeup brands. It claims to be totally consistent with today’s confident woman. Maybelline products targets three customer segments; youngster (16 to 25), office lady (26-35), and career women (35 plus).

    Explain 09:

    The marketing mix for the Maybelline line of products consists of two main strategies; foreign consumer cultural positioning; and, symbolic New York City imagery that women can relate to everywhere. Maybelline promotion includes the different way of grabbing attention including promotional coupons; online advertising; sponsorship of fashion shows; signing fashion icons as spokesperson of the product; free makeup consultancy and providing scholarships, etc.; we can see as American cosmetic market is a mature market so L’Oréal tries to rely on mature marketing tactics. In the early 20th century, even American society was not very much open to makeup and skincare products.

    People thought that only sinful women should wear makeup; but, eventually with the economic independence that the American women gained; makeup and cosmetics started coming into the mainstream. Cosmetics apparently became the symbol of new self-belief that the American women were beaming with; and remember even Maybelline claims to be totally consistent with today’s women; there are several other punchlines like ‘maybe she’s born with it’, ‘maybe it’s Maybelline’; all the punchlines keep the self-confidence of women in the center as if its not the makeup but its the attitude that has to be worn.

    Explain 10:

    That’s why women of every nationality and culture started identifying themselves with the product; and, this became the symbol of the 21st-century woman. The mindset and the lifestyle of the customer heavily impacted by the culture. Culture defines by different norms, values, interactions, language, and other personal components shared by groups of people across the world. It is a social phenomenon that defines people’s interests, thoughts, and other behaviors they may exhibit in social life.

    From one country to another, humans have evolved and developed different types of expressions, beliefs, and behavior; which can be difficult to understand for someone who does not belong to the same culture. Culture is the way how the members of a particular group interact with each other on the sharing of the available means; now that determines what is going to be the need for a particular product in that society; that also decides whether a particular advertising strategy will work or not; and, how exactly that will interpret by the target customers.

    Explain 11:

    In different markets, consumer requirements and consumer behavior may vary. Cultural aspects deeply impact consumer behavior; the impact may be direct or indirect. The cultural distinction creates the consumer behavior difference, as it can notice between the Asian and European continents where the culture and the behaviors are very different. Being a global organization L’Oréal certainly needs to understand the cultural differences and position its products; accordingly, otherwise, the results may be far more different than they are at this moment. The thrust has to be on hitting the right customer with the right product.

    This can be possible only if one has a deep knowledge of local culture and beliefs. A very interesting example would be lipstick use in China; according to research, only 3% of women use lipstick for makeup. The reason that was supposed to be behind this low percentage of lipstick use is even weirder; women in China have concerns about ingesting lipstick. L’Oréal surveyed to see whether this is just an age-old saying or it holds some truth; based on the findings it came up with a lipstick that had vitamins in it, and in turn, the demand for L’Oréal vitamin lipsticks increased. Another example could be really handy; in India long hair consider necessary for a woman to consider beautiful.

    Explain 12:

    L’Oréal considered this fact while launching its shampoo product in India; and, it focused on publicizing the fact that using the Garnier Fructis shampoo helps in getting long and strong hair. This strategy made the product very popular in India. In China or India, people like to have a fair complexion. In Asia, women take special care of their skin. People want radiant skins and lotions that can nourish their skin against the sun; whereas in the United States people would rather buy tanning cream.

    On basis of this knowledge, L’Oréal can position their whitening creams in India; and, the interesting part is the way the advertisements could interpret; the way the advertisements for the fairness creams make in Asian countries can interpret as racial advertisements in the USA; but, in Asian countries that seem to be quite usual. Now that’s where the knowledge of the culture and beliefs comes in handy and helps to avoid unnecessary problems. From a business point of view; companies have to adapt themselves to the culture of each country in which they want to have a business. Because of the differences in culture between countries; companies need to adjust their products and services according to local demands.

    This will help them to create and develop a brand image across the globe bases on a large number of globally-recognized products. L’Oréal was able to be successful in these markets; because it adapted to the ground realities of the particular market yet it followed a standardized strategy. If we consider the marketing mix of Maybelline, it has a two-pronged strategy; one for the foreign markets is the global street-smart image of the American chic.

    Explain 13:

    The global street-smart image of New York chick can admire in almost all the urban centers, be it India, China, or Brazil. However, there has to be the right mix of local flavor as well. The most important part of L’Oréal’s strategic plan is to opportunity hunting or the marketing of its products worldwide. From the initial days, it already started catering to the demands of women worldwide. To do that efficiently, they were expected to be well aware of the diversities of women across the globe.

    Once they knew the diversities their job was to come up with a different line of products suitable to women from all parts of the world. Innovation has been the keyword for L’Oréal and this was made possible through constant research and development over the years. The group has already covered most parts of the world and still striving to cover more. To do so, the L’Oréal group has to keep respecting other people’s identity, ideas, and culture. L’Oréal has to keep valuing different cultures and nationalities to get their brand value up; and, it seems that they have been doing it really well.

    The success story can continue further because even today products of L’Oréal touch the cultural values instilled in the potential customer’s mind. L’Oréal just doesn’t sell the product it makes the customer buy the idea of dreaming big; but, remaining rooted in the core cultural values. It has carefully devised its global marketing strategy and customized it to the local needs; and, that’s the reason people from Africa to Europe and America to Australia are using the L’Oréal products.

    L'Oréal Global Branding Strategy explains What their Case Study
    L’Oréal Global Branding Strategy explains What? their Case Study. Image credit from L’Oréal.

  • Marketing Management Meaning, Characteristics, and Objectives

    Marketing Management Meaning, Characteristics, and Objectives

    Meaning: Marketing management facilitates The activities and functions which are involved in the distribution of goods and services. Marketing Management Meaning, Characteristics, and Objectives. Their sales plan to a greater extent rest upon the requirements and motives of the consumers in the market. This objective, the organization has to pay heed to the right pricing, effective advertising and sales promotion, distribution and stimulating the consumers through the best services.

    You are one of a Seller or Buyer in Market, So let’s know Marketing Management of Meaning, Characteristics, and Objectives. With Meaning and Definition.

    What is Marketing Management? Marketing management signifies an important functional area of the business manager responsible for the flow of goods and services from the producers to the consumers. It is accountable for planning, organizing, directing, coordinating, motivating and controlling the marketing activities. The types of Product in Marketing Management! In effect, it is the demand management under customer-oriented marketing philosophy.

    Meaning of Marketing Management:

    Marketing management is the management of the crucial and creative task of delivering consumer satisfaction and thereby earning profits through consumer demand. It is the performance of managerial functions of planning, execution, coordination, and control in relation to the marketing functions of marketing research, product planning and development, pricing, advertising, selling and distribution with a view to satisfying the needs of the consumer, business and society. The above expressions bring home very clearly the very substance of marketing management as a matter of planning, implementing and controlling the marketing programmes.

    Marketing management is the marketing concept in action. It includes all activities which are necessary to determine and satisfy the needs of consumers. To be very simple, marketing management sets marketing objectives, develops marketing plans, organizes marketing functions, puts marketing plans and strategies in action and monitors the marketing programmes in the final analysis. Effective marketing management requires the ability and skill of the highest order.

    It warrants close appreciation of the consumer and an understanding of forces of change which are at work in the environment and which have the deep-rooted impact on consumer buying habits and motives. It calls for fertile imagination and creative skill in planning to meet the changing conditions of the marketplace; it also requires skills of coordinating and controlling the wide-spread and complex activities of a dynamic organization. The prime purpose of marketing management is to know the consumer so well that the firm is able to offer him or her products and services to which the consumer remains loyal and the new consumers keep on coming at increasing level.

    Definition of Marketing Management:

    According to Philip Kotler, “Marketing management is the analysis, planning, implementation and control of programmes designed to bring about desired exchanges with target markets for the purpose of achieving organizational objectives. It relies heavily on designing the organizations offering in terms of the target markets needs and desires and using effective pricing, communication, and distribution to inform, motivate and service the market.”

    Marketing management is concerned with the chalking out of a definite programme, after careful analysis and forecasting of the market situations and the ultimate execution of these plans to achieve the objectives of the organization. Marketing management is “The art and science of choosing target markets and getting, keeping, and growing customers through creating, delivering, and communicating superior customer value” by Kotler and Keller.

    Features or Characteristics of Marketing Management:

    Some of the main points characteristics of marketing management are as follows:

    Customer-Orientation:

    All business activities should be directed to create and satisfy the customer. Emphasis on the needs and wants of consumers keeps the business on the right track. All marketing decisions should be made on the basis of their impact on the customer. The consumer becomes the guise of business. Also, learn Explaining Product Development in Production Management.

    Marketing Research:

    Under the marketing concept; knowledge and understanding of customer’s needs want and desires is very vital. Therefore, a regular and systematic marketing research programme is required to keep abreast of the market. In addition, innovation and creativity are necessary to match the products of requirements of customers.

    Marketing research is “the process or set of processes that link the producers, customers, and end users to the marketer through information used to identify and define marketing opportunities and problems; generate, refine, and evaluate marketing actions; monitor marketing performance; and improve understanding of marketing as a process. Marketing research specifies the information required to address these issues, designs the method for collecting information, manages and implements the data collection process, analyzes the results, and communicates the findings and their implications.” by Wikipedia.

    Up-to-date and adequate knowledge must be available to answer the following questions:

    • What business are we really in?
    • Who are our customers?
    • What do the customers want?
    • How should we distribute our products?
    • How can we communicate most effectively with our customers?’
    Marketing Planning:

    The marketing concept calls for a goal-oriented approach to marketing. The overall objectives of the firm should be the earning of profits through the satisfaction of customers. “A marketing plan may be part of an overall business plan. Solid marketing strategy is the foundation of a well-written marketing plan. While a marketing plan contains a list of actions, without a sound strategic foundation, it is of little use to a business” by Wikipedia. On the basis of this goal, the objectives and policies of marketing and other departments should be defined precisely. Marketing planning helps to inject the philosophy of consumer-orientation into the total business systems and serves as a guide to the organization’s efforts.

    Integrated Marketing:

    Once the organizational and departmental goals are formulated, it becomes necessary to harmonize the organizational goals with the goals of the individuals working in the organization. The activities and operation of various organizational units should be properly coordinated to achieve the defined objectives. The marketing department should develop the marketing mix which is most appropriate for accomplishing the desired goals through the satisfaction of customers.

    Customer Satisfaction:

    “Customer satisfaction is a term frequently used in marketing. It is a measure of how products and services supplied by a company meet or surpass customer expectation” by Wikipedia. The aim should be to maximize profit over the long run through the satisfaction of customers wants.

    Aim or Objectives of Marketing Management:

    In the light of this statement, we can highlight the aim’s of marketing management as follows:

    • Creation of Demand: The marketing management’s first objective is to create demand through various means. A conscious attempt is made to find out the preferences and tastes of the consumers. Goods and services are produced to satisfy the needs of the customers. Demand is also created by informing the customers about the utility of various goods and services.
    • Customer Satisfaction: The marketing manager must study the demands of customers before offering them any goods or services. Selling the goods or services is not that important as the satisfaction of the customers’ needs. Modern marketing is customer- oriented. It begins and ends with the customer.
    • Market Share: Every business aims at increasing its market share, i.e., the ratio of its sales to the total sales in the economy. For instance, both Pepsi and Coke compete with each other to increase their market share. For this, they have adopted innovative advertising, innovative packaging, sales promotion activities, etc.
    • Generation of Profits: The marketing department is the only department which generates revenue for the business. Sufficient profits must be earned as a result of the sale of want-satisfying products. If the firm is not earning profits, it will not be able to survive in the market. Moreover, profits are also needed for the growth and diversification of the firm.
    • Creation of Goodwill and Public Image: To build up the public image of a firm over a period is another objective of marketing. The marketing department provides quality products to customers at reasonable prices and thus creates its impact on the customers.
    • Creating Customers: A business firm is established to sell a product or service to customers. Therefore, the customer is the foundation of a business. It is the customer who provides revenue to business and determines what an enterprise will sell. Creating customers means exploring and identifying the needs and requirements of customers. If a firm is to go and stay in business, it must create new customers. It should analyze and understand their wants.
    • Satisfying Customers Needs: Creating customer is not enough. Business should develop and distribute products and services which meet the requirements of customers to their satisfaction. If customers are not satisfied, the business will not be able to generate revenues to meet its costs and to earn a reasonable return on its capital. Satisfying customers does not simply mean matching products with customers’ needs. It also requires the regular supply of goods and services of reasonable quality at fair prices.

    The marketing manager attempts to raise the goodwill of the business by initiating image-building activities such a sales promotion, publicity and advertisement, high quality, reasonable price, convenient distribution outlets, etc. The objectives of marketing management have been obtained from the overall objectives of the business. The overall aim of the business is to create, develop and serve society with other things. Marketing management can contribute to the achievement of these objectives by developing and distributing those objectives and services that meet the needs of the customers and benefit the business enterprise.

    Summary: Marketing Management Meaning, Characteristics, and Objectives.

    What is Marketing Management? Explains.

    1. Meaning of Marketing Management.

    2. Definition of Marketing Management.

    3. Features or Characteristics of Marketing Management, and:

    • Customer-Orientation.
    • Marketing Research.
    • Marketing Planning.
    • Integrated Marketing, and.
    • Customer Satisfaction.

    4. Objectives of Marketing Management:

    • Creation of Demand.
    • Customer Satisfaction.
    • Market Share.
    • Generation of Profits.
    • Creation of Goodwill and Public Image.
    • Creating Customers, and.
    • Satisfying Customers Needs.

    Marketing Management Meaning Characteristics and Objectives

  • Accounting Principles points in Meaning Definition and Features

    Accounting Principles points in Meaning Definition and Features

    Explore the importance of accounting principles. Learn about their meaning, definition, and features, and understand how they guide the efforts of accountants and auditors. To search for the goals of the accounting profession and for expanding knowledge in this field, A logical and useful set of principles and procedures are to develop. Explained each one point, Accounting Principles points in Meaning Definition and Features. We know that while driving our vehicles, follow standard traffic rules.

    Accounting Principles Understand in these points Meaning, Definition, and Features.

    Without adhering traffic rules, there would be much chaos on the road. Similarly, some principles apply to the account. Thus, the accounting profession cannot reach its goals in the absence of a set of rule to guide the efforts of accountants and auditors. The rules and principles of accounting are commonly referring to as the conceptual framework of accounting.

    Meaning of Accounting Principles:

    They are a man make. Unlike the principles of Physics, Chemistry and other natural sciences; accounting principles were not deduced from basic axioms, nor their validity is verifiable through observations or experiments. These principles are drawn from the practical practice of accounting.

    Definition of Accounting Principles:

    They have been defining by the Canadian Institute of Chartered Accountants as,

    “The body of doctrines commonly associated with the theory and procedure of accounting serving as an explanation of current practices and as a guide for the selection of conventions or procedures where alternatives exist. Rules governing the formation of accounting axioms and the principles derived from them have arisen from common experience, historical precedent statements by individuals and professional bodies and regulations of Governmental agencies.”

    According to Hendriksen (1997), Accounting theory may define as logical reasoning in the form of a set of broad principles that;

    • Provide a general frame of reference by which accounting practice can evaluate, and.
    • Guide the development of new practices and procedures.

    The theory may also use to explain existing practices to obtain a better understanding of them. But the most important goal of accounting theory should be to provide a coherent set of logical principles that form the general frame of reference for the evaluation and development of sound accounting practices.

    No list of universally accepted principles can prepare but still, certain principles are drawn which are acceptable by most of the accountants.

    According to the Terminology Committee of AICPA,

    “The word principles are used to mean a general law or rule adopted or preferred as a guide to action; a settled ground or basis of conduct or practice.”

    A.W. Johnson describes as,

    “Broadly speaking, these principles are the assumptions and rules of accounting, the methods, and procedures of accounting and the application of these rules, methods, and procedures to the actual practice of accounting.”

    Definition and Explanation:

    Accounting is the language of business through which economic information is communicating to all the parties concerned. In order to make this language easily understandable all over the world, it is necessary to frame or make certain uniform standards which are accepting universally. These standards are termed “Accounting Principles”.

    They may define as those rules of action or conduct which are adopting by the accountants universally while recording accounting transactions. It is a body of doctrines commonly associated with the theory and procedures of accounting. They are serving as an explanation of current practices and as a guide for the selection of conventions or procedures where alternatives exist.

    The American Institute of Certified Public Accountants (AICPA) has advocated the use of the word” Principle” in the sense in which it means “rule of action”. It discusses the generally accepted accounting principles as follows: Financial statements are the product of a process in which a large volume of data about aspects of the economic activities of an enterprise are accumulating, analyze and report.

    This process should carry out in conformity with generally accepted accounting principles. These principles represent the most current consensus about how accounting information should record, what information should disclose, how it should disclose, and which financial statement should prepare. Thus, generally accepted principles and standards provide a common financial language to enable informed users to read and interpret financial statements. Thus, we may define Accounting Principles as those rules of action or conduct which are adopting by the accountants universally while recording accounting transactions.

    Features of Accounting Principles:

    They are synthetic. It is acceptable because they are believing to be useful. The general acceptance of an accounting principle usually depends on how well it meets the following three basic norms:

    • Usefulness.
    • Objectiveness and.
    • Feasibility.

    A principle is useful to the extent that it results in meaningful or relevant information to those who need to know about a certain business. In other words, an accounting rule, which does not increase the utility of the records to its readers, is not acceptable as an accounting principle. A principle is objective to the extent. That the information is not influencing by the personal bias or Judgement of those who furnished it. Accounting principle says to be objective when it solidly supports by facts. Objectivity means reliability which also means that the accuracy of the information reported can verify.

    Accounting principles should be such as are practicable. A principle is feasible when it can implement without undue difficulty or cost. Although these three features are generally finding in accounting principles. An optimum balance of three is struck in some cases for adopting a particular rule as an accounting principle. For example, the principle of making the provision for doubtful debts find on feasibility and usefulness though it is less objective. This is because of the fact that such provisions are not supporting by any outside evidence.

    Essential Features of Accounting Principles:

    They are acceptable if they satisfy the following norms:

    Relevance or Usefulness:

    A principle will be relevant only if it satisfies the needs of those who use it. The accounting principle should be able to provide useful information to its users otherwise it will not serve the purpose. Also, know this What do you think of Data Warehousing?

    Objectivity:

    A principle will say to be objective if it bases on facts and figures. There should not be a scope for personal bias. If a principle can influence the personal bias and whims of users. It will not be an objective principle and its usefulness will limit. The cost principle will be more useful than the value principle. Because the value will base on market prices and personal judgment will differ in finding out value.

    Feasibility:

    The accounting principles should be practicable. The principles should be easy to use otherwise their utility will limit. While showing fixed assets in the balance sheet, it will be more feasible to take cost less depreciation. If the assets are shown on market value or replacement cost basis. Then, it will involve difficulties and different persons will take different values because market prices go on changing every time.

    The features mentioned above should be present in accounting principles. But in some cases, the optimum balance of these features is struck for adopting. A particular rule as the accounting principle. Sometimes one feature may have to sacrifice for the other so that it may adopt as the principle. Explains and define Entrepreneurial Marketing and SME.

    We may show fixed assets at replacement cost. Because it is practicable and actual cost principle may not be able to give correct results. As the rise in price index will make it less useful. Similarly, the principle of making provision for doubtful debts founds on the feasibility and usefulness basis though it is less objective. Such provisions are not supporting by any outside evidence and there is always a fear of personal bias.

  • Explanation of Financial Statements: Objectives, Importance, and Limitations

    Explanation of Financial Statements: Objectives, Importance, and Limitations

    Financial statements are the product of a process in which a large volume of data about aspects of the economic activities of an enterprise are accumulated, analyzed and reported. Explanation of Financial Statements: Objectives, Importance, and Limitations – Keep study and learn. This process should carry out in conformity with generally accepted accounting principles. These principles represent the most current consensus about how accounting information should record, what information should be disclosed, how it should be disclosed, and which financial statement should prepare.

    Financial Statements explanation of each, Meaning of Financial Statements, Objectives of Financial Statements, Importance, and Limitations of Financial Statements.

    Thus, generally accepted principles and standards provide a common financial language to enable informed users to read and interpret financial statements. Financial statements are prepared primarily for decision-making. They play a dominant role in setting the framework of managerial decisions. But the information provided in the financial statements is not an end in itself as no meaningful conclusions can draw from these statements alone.

    However, the information provided in the financial statements is of immense use in making decisions through analysis and interpretation of financial statements. Financial analysis is the process of identifying the financial strengths and weaknesses of the firm by properly establishing the relationship between the items of the balance sheet and the profit and loss account. There are various methods or techniques used in analyzing financial statements, such as comparative statements, common-size statements, trend analysis, schedule of changes in working capital, funds flow, cash flow analysis, and ratio analysis. Related learn Financial Accounting: Meaning, Nature, and Scope!

    Meaning of Financial Statements: 

    Financial Statements are the collective name given to Income Statement and Positional Statement of an enterprise which shows the financial position of a business concern in an organized manner. We know that all business transactions are first recorded in the books of original entries and thereafter posted to relevant ledger accounts. For checking the arithmetical accuracy of books of accounts, a Trial Balance is prepared.

    The trial balance is a statement prepared as a first step before preparing financial statements of an enterprise which record all debit balances in the debit column and all credit balances in the credit column. To find out the profit earned or loss sustained by the firm during a given period and its financial position at a given point in time is one of the purposes of accounting. For achieving this objective, financial statements are prepared by the business enterprise, which includes the income statement and positional statement.

    A firm communicates to the users through financial statements and reports.  The financial statements contain summarized information on the firm’s financial affairs, organized systematically. Preparation of the financial statements is the responsibility of top management.  They should prepare very carefully and contain as much information as possible.

    Two basis financial statements prepared for external reporting to owners, investors, and creditors are:
    1. Statement of financial position (or Balance sheet): Balance sheet contains information about the resources and obligations of a business entity and about its owners’ interests in the business at a particular point in time. In accounting’s terminology, balance sheet communicates information about assets, liabilities and owner’s equity for a business firm as on a specific date.  It provides a snapshot of the financial position of the firm at the close of the firm’s accounting period.
    2. Income statement (or Profit and loss account): The profit and loss account presents the summary of revenues, expenses and net income (or net loss) of a firm for some time. Net income is the amount by which the revenues earned during a period exceed the expenses incurred during that period.

    More information is required for planning and controlling and therefore the financial accounting information is presented in different statements and reports in such a way as to serve the internal needs of management.  Financial statements are prepared from the accounting records maintained by the firm.

    These two basic financial statements viz:

    (i) Income Statement,  or Trading, and Profit & Loss Account and (ii) Positional Statement, or Balance Sheet portrays the operational efficiency and solvency of any business enterprise.

    The following formula summarizes what a balance sheet shows:

    ASSETS = LIABILITIES + SHAREHOLDER’S EQUITY

    A company’s assets have to equal, or “balance,” the sum of its liabilities and shareholder’s equity.

    The income statement shows the net result of the business operations during an accounting period and positional statement, a statement of assets and liabilities, shows the final position of the business enterprise on a particular date and time. So, we can also say that the last step of the accounting cycle is the preparation of financial statements.

    The income statement is another term used for Trading and Profit & Loss Account. It determines the profit earned or loss sustained by the business enterprise during a period. In the large business organization, usually one account i.e., Trading and Profit & Loss Account is prepared for knowing gross profit, operating profit, and net profit.

    On the other hand, in small size organizations, this account is divided into two parts i.e. Trading Account and Profit and Loss Account. To know the gross profit, Trading Account is prepared and to find out the operating profit and net profit, Profit and Loss Account is prepared. The positional statement is another term used for the Balance Sheet. The position of assets and liabilities of the business at a particular time is determined by the Balance Sheet.

    Objectives of financial statements are:

    • To provide reliable financial information about economic resources and obligations of a business enterprise.
    • Reliable information about changes in the resources (resources minus obligations) of an enterprise that result from the profit-directed activities.
    • Financial information that assists in estimating the earning potential of the enterprise.
    • Other needed information about changes in economic resources and obligations.
    • To disclose, to the extent possible, other information related to the financial statement that is relevant to statement users

    Objective and Importance:

    The profitability of Business:

    Financial statements are required to ascertain whether the enterprise is earning the adequate profit and to know whether the profits have increased or decreased as compared to the previous years so that corrective steps can be taken well in advance.

    The Solvency of the Business:

    Financial statements help to analyze the position of the business as regards to the capacity of the entity to repay its short as well as long-term liabilities.

    The Growth of the Business:

    Through comparison of data of two or more years of business entity, we can draw a meaningful conclusion about the growth of the business. For example, an increase in sales with a simultaneous increase in the profits of the business indicates a healthy sign for the growth of the business.

    Financial Strength of Business:

    Financial statements help the entity in determining the solvency of the business and help to answer various aspects viz., whether it is capable to purchase assets from its resources and/or whether the entity can repay its outside liabilities as and when they become due.

    Making Comparison and Selection of Appropriate Policy:

    To make a comparative study of the profitability of the entity with other entities engaged in the same trade, financial statements help the management to adopt the sound business policy by making Intra firm comparison.

    Forecasting and Preparing Budgets:

    The financial statement provides information regarding the weak-spots of the business so that the management can take corrective measures to remove these shortcomings. Financial statements help the management to make the forecast and prepare budgets.

    Communicating with Different Parties:

    Financial statements are prepared by the entities to communicate with different parties about their financial position. Hence, it can be concluded that understanding the basic financial statements is a necessary step towards the successful management of a commercial enterprise.

    Limitations of Financial Statements:

    Manipulation or Window Dressing:

    Some business enterprises resort to manipulating the information contained in the financial statements to cover up their bad or weak financial position. Thus, the analysis based on such financial statements may be misleading due to window dressing.

    Use of Diverse Procedures:

    There may be more than one way of treating a particular item and when two different business enterprises adopt different accounting policies, it becomes very difficult to make a comparison between such enterprises. For example, depreciation can be charged under the straight-line method or written down value method. However, the results provided by comparing the financial statements of such business enterprises would be misleading.

    Qualitative Aspect Ignored:

    The financial statements incorporate the information which can be expressed in monetary terms. Thus, they fail to assimilate the transactions which cannot be converted into monetary terms. For example, a conflict between the marketing manager and sales manager cannot be recorded in the books of accounts due to its non-monetary nature, but it will certainly affect the functioning of the activities adversely and consequently, the profits may suffer.

    Historical:

    Financial statements are historical as they record past events and facts. Due to continuous changes in the demand of the product, policies of the firm or government, etc, analysis based on past information does not serve any useful purpose and gives the only post­mortem report.

    Price Level Changes:

    Figures contained in financial statements do not show the effects of changes in the price level, i.e. price index in one year may differ from the price index in other years. As a result, the misleading picture may be obtained by making a comparison of figures of the past year with current year figures.

    Subjectivity & Personal Bias:

    Conclusions drawn from the analysis of figures given in financial statements depend upon the personal ability and knowledge of an analyst. For example, the term ‘Net profit’ may be interpreted by an analyst as net profit before tax, while another analyst may take it as net profit after tax.

    Lack of Regular Data/Information:

    Analysis of financial statements of a single year has limited uses. The analysis assumes importance only when compared with financial statements, relating to different years or different firm.

    Financial statements are the means of conveying to management, owners and interested outsiders a concise picture of profitability and financial position of the business. The preparation of the final accounts is not the first step in the accounting process but they are the end products of the accounting process which give concise accounting information of the accounting period after the accounting period is over. To know the profit or loss earned by a firm, Trading, and Profit and Loss Account is prepared. Balance Sheet will portray the financial condition of the firm on a particular date.

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