Tag: Objectives

  • Explanation of Statement of Cash Flows with Objectives

    Explanation of Statement of Cash Flows with Objectives

    What does the Statement of Cash Flows mean? In accounting, a statement of cash flows, also known as the cash flow statement, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities. Explanation of Statement of Cash Flows with Objectives. The statement of cash flows is one of three very important financial reports. That managers and investors look at when analyzing a company’s past or present financial status.

    Know and Understand the Concept of the Statement of Cash Flows.

    The balance sheet and the income statement are the other two reports. All of these reports are very important in running a successful business. But the statement of cash flows is the most important. It is like the blood of a company since it would not survive successfully without it. Cash on hand can be much more important. Than income, profits, assets, and liabilities put together, especially in the early stages of any company.

    Introduction:

    The statement of cash flows tells us how much cash we have on hand after all costs are met. It shows how much cash we started with and how much we pay out. There are two parts to the statement of cash flows which are the top and bottom halves. The top half deals with the inflow and outflow of the company’s cash.

    The bottom half of the statement reports where the funds end up. Just like the balance sheet, the top and bottom halves of a cash flow statement match. Knowing just how important it is to have cash on hand to pay the bills we want to make sure and review cash flow statement regularly.

    Cash flow is a little more honest than an income statement because the cash flow statement shows money coming in only when we deposit it and money going out only when we physically write out a check. Because the statement of cash flows reflects the actual receipt of cash, no matter where it comes from, the entries are a bit different from the revenue shown in a company’s income statement.

    These funds are usually made up of gross receipts on sales, dividend and interest income, and invested capital. Gross receipts on sales represent the total money that we take in on sales during the period. Gross receipts are based on our gross revenue, of course, but they also take into account when you receive payment. Dividend and interest income is the income that we receive from savings accounts and other securities.

    Meaning:

    The statement of cash flows is one of the financial statements issued by business and describes the cash flows into and out of the organization. Its particular focus is on the types of activities that create and use cash, which are operations, investments, and financing. Though the statement of cash flows is generally considered less critical than the income statement and balance sheet, it can use to discern trends in business performance that are not readily apparent in the rest of the financial statements.

    This is one of those amounts that are also reporting on the income statement and should be the same as long as we receive the money during the period covered by the cash flow statement. Invested capital is part of the owner’s equity in the balance sheet. Although it does not represent revenue from our business operations and would not be part of the income statement, it can be a source of cash for our company.

    Extra Knowledge:

    The statement of cash flows keeps track of the costs and expenses that incur for anything and everything. Some of the expenses appear in the income statement and some don’t because they don’t directly relate to our costs of doing business. These funds consist of the cost of goods produced, sales, administration, interest expense, taxes, etc. The cost of goods produced is exactly that, the cost incurred to produce our product or service during the period. Sales expenses are the same expenses that appear in an income statement except that paying off bills or postponing payments may change the amounts. On to the bottom half of the statement of cash flows which shows where the money is ending up.

    When the company’s cash reserves raise the money flows into one or more of asset accounts. The bottom half of the cash flow statement keeps track of what is happening to those accounts. This part of the statement consists of changes in liquid assets and net change in cash position. With cash flowing in and out of the company, liquid assets are going to change during the period covered by the cash flow statement. The items listed in this portion of the cash flow statement are the same ones that appear in the balance sheet. Raising the level of our liquid asset accounts has the effect of strengthening the cash position.

    Explanation of Statement of Cash Flows with Objectives
    Explanation of Statement of Cash Flows with Objectives, #Pixabay.

    Cash flow analysis:

    To properly construct a cash flow analysis, we have to look at three very important activities which are operating, investing and financing.

    • Operating activities are the cash components that are generating from the sales of the companies goods or products affecting the core business operation. These include the purchase of raw materials, production costs, advertising cost and even the delivery to customers.
    • Investing activities are straight forward items that report adjustments in the balances of fixed asset accounts like equipment, buildings, land, and vehicles. Investing activities include making and collecting loans and acquiring and disposing of investments and property, plant and equipment.
    • Financing activities are cash adjustments to fixed liabilities and owners’ equity. Cash increases when the company takes up a loan or raised capital when dividends are paid out, cash decreases accordingly. Financing activities involve liabilities and owner’s equity items. They include obtaining resources from owners and providing them with a return on their investments and borrowing money from creditors to repay the amounts borrowed.

    #Objectives of the statement of cash flows:

    There are a few main objectives of the statement of cash flows one of which is to help assess the timing, amounts and the uncertainty of future cash flows. This is one of the quarterly financial reports that publicly traded companies are required to release to the public. Because public companies tend to use accrual accounting. The income statements they release each quarter may not necessarily reflect changes in their cash positions.

    The statement of cash flows is very important to businesses. Because it helps investors see where the company can benefit from better cash management. There are many profitable companies today that still fail at adequately managing their cash flow. So it is important to be able to see where the weaknesses are to correct them.

    Conclusion of Objectives:

    In conclusion, the objectives are to explain why the statement of cash flows is very important for companies and people. That want to invest in a certain company. It shows how well a company manages its cash in-comings and outgoings as well as showing how profitable a company might be or become.

    It is a very clear document to understand so that we don’t fall victim to making a profit while still going broke. It’s also helpful for the companies finance department. So that they can see where the company stands to get more potential investors. It’s a great resource to look at to recap a company’s financial standing that most people can understand.

    What does Financial Statements mean?

    A firm communicates to the users through financial statements and reports. The financial statements contain summarized information of 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:

    Balance sheet:

    The balance sheet contains information about the resources and obligations of a business entity and about. Its owner’s interests in the business at a particular point of 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.

    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 requires planning and controlling and therefore the financial accounting information is presenting in different statements and reports in such a way as to serve the internal needs of management. Financial statements are preparing from the accounting records maintaining by the firm.

    The various objectives of financial statements are:

    • To provide reliable financial information about economic resources and obligations of a business enterprise.
    • To provide reliable information about changes in the resources of an enterprise that result from the profit-directed activities.
    • Also, financial information that assists in estimating the earning potential of the enterprise.
    • To provide 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.
  • Cash Flow Statement: Explanation, Classification, and Objectives

    Cash Flow Statement: Explanation, Classification, and Objectives

    What does Cash Flow Statement mean? A cash flow statement counters the ambiguity regarding a company’s solvency that various accrual accounting measures create. We are studying Cash Flow Statement: Explanation, Classification, and Objectives; In financial accounting, a cash flow statement, also known as statement of cash flows, is a financial statement that shows how changes in balance sheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing, and financing activities.

    Here explains the Concept of Cash Flow Statement with their Explanation, Classification, Objectives, and Limitations.

    The following concept is; Explanation of Cash Flow Statement, Classification of Cash Flow Statement, Objectives of Cash Flow Statement, and Limitations of the Cash Flow Statement. Meaning: A Cash Flow Statement is a statement which is prepared by acquiring Cash from different sources and the application of the same for different payments throughout the year. It is prepared from analysis of cash transactions, or it converts the financial transactions prepared under accrual basis to cash basis.

    The information about the number of resources provided by operating activities or net income after the adjustment of certain other charges can also obtain from it. The changes in Cash both at the beginning and at the end can also know with the help of this statement and that is why it is called Cash Flow Statement.

    #Explanation of Cash Flow Statement:

    A cash flow statement is an important indicator of financial health because a company can show profits while not having enough cash to sustain operations. It is a financial report that shows to the user the source of a company’s cash and how it was spent over a specific period. A cash flow statement counters the ambiguity regarding a company’s solvency that various accrual accounting measures create.

    It also categorizes the sources and uses of cash to provide the reader with an understanding of the amount of cash a company generates and uses in its operations. As opposed to the amount of cash provided by sources outside the company. Such as borrowed funds or funds from stockholders. They also tell the reader how much money was spent on items that do not appear on the income statement. Such as loan repayments, long-term asset purchases, and payment of cash dividends.

    The cash flow statement was previously known as the flow of funds statement. The cash flow statement reflects a firm’s liquidity. The balance sheet is a snapshot of a firm’s financial resources and obligations at a single point in time, and the income statement summarizes a firm’s financial transactions over an interval of time. These two financial statements reflect the accrual basis accounting used by firms to match revenues with the expenses associated with generating those revenues.

    Extra Knowledge:

    They include only inflows and outflows of cash and cash equivalents; it excludes transactions that do not directly affect cash receipts and payments. These non-cash transactions include depreciation or write-offs on bad debts or credit losses to name a few. It is a cash basis report on three types of financial activities: operating activities, investing activities, and financing activities. Non-cash activities are usually reported in footnotes.

    It is intended to provide information on a firm’s liquidity and solvency and its ability to change cash flows in future circumstances provide additional information for evaluating changes in assets, liabilities, and equity improve the comparability of different firms’ operating performance by eliminating the effects of different accounting methods indicate the amount, timing and probability of future cash flows. The cash flow statement has been adopting as a standard financial statement because it eliminates allocations, which might derive from different accounting methods, such as various time-frames for depreciating fixed assets.

    #Classification of Cash Flow Statement:

    The cash flow statement should report cash flows during the period classification by operating, investing and financing activities.

    Thus, cash flows are classifying into three main categories:

    1. Operating activities.
    2. Investing activities.
    3. Financing activities.

    Now, explain;

    Operating Activities:

    Operating activities are the principal revenue-producing activities of the enterprise and other activities that are not investing or financing activities. The amount of cash flows arising from operating activities is a key indicator of the extent to which the operations of the enterprise have generated sufficient cash flows to maintain the operating capability of the enterprise, pay dividends, repay loans, and make new investments without recourse to external sources of financing.

    Information about the specific components of historical operating cash flows is useful, in conjunction with other information, in forecasting future operating cash flows. Cash flows from operating activities are primarily derived from the principal revenue-producing activities of the enterprise. Therefore, they generally result from the transactions and other events that enter into the determination of net profit or loss.

    Explanations:

    Examples of cash flows from operating activities are:

    • A cash receipts and cash payments of an insurance enterprise for premiums and claims, annuities and other policy benefits.
    • Cash receipts from the sale of goods and the rendering of services.
    • Cash receipts from royalties, fees, commissions, and other revenue.
    • The cash payments to suppliers of goods and services.
    • Cash payments to and on behalf of employees.
    • Refunds or cash payments of income taxes unless they can specifically identify with financing and investing activities, and.
    • Cash receipts and payments relating to futures contracts, forward contracts, option contracts, and swap contracts when the contracts are heling for dealing or trading purposes.

    Some transactions, such as the sale of an item of plant, may give rise to a gain or loss which includes in the determination of net profit or loss. However, the cash flows relating to such transactions are cash flows from investing activities.

    Investing Activities:

    Investing activities are the acquisition and disposal of long-term assets and other investments not included in cash equivalents. The separate disclosure of cash flows arising from investing activities is important because the cash flows represent the extent to which expenditures have been making for resources intended to generate future income and cash flows.

    Explanations:

    Examples of cash flows arising from investing activities are:

    • The cash payments to acquire fixed assets. These payments include those relating to capitalized research & development costs and self-constructed fixed assets.
    • Cash receipts from the disposal of shares, warrants, or debt instruments of other enterprises and interests in the joint venture.
    • Cash advances and loans made to third parties, other than advances and loans made by a financial enterprise.
    • The cash receipts from disposal of fixed assets.
    • Cash receipts from the repayment of advances and loans made to third parties, other than advances and loans of a financial enterprise.
    • Cash payments to acquire shares, warrants, or debt instruments of other enterprises and interests in joint ventures. Other than payments for those instruments considering to be cash equivalents and those held for dealing or trading purposes.
    • The cash payments for futures contracts, forward contracts, option contracts, and swap contracts except when the contracts are heling for dealing or trading purposes, or the payments are classifying as financing activities, and.
    • Cash receipts from futures contracts, forward contracts, option contracts, and swap contracts except when the contracts are heling for dealing or trading purposes or the receipts are classifying as financing activities.
    Financing Activities:

    Financing activities are activities that result in changes in the size and composition of the owner’s capital and borrowings of the enterprise. The separate disclosure of cash flows arising from financing activities is important because .it is useful in predicting claims on future cash flows by providers of funds (both capital and borrowings) to the enterprise.

    Explanations:

    Examples of cash flows arising from financing activities are:

    • Cash proceeds from issuing shares or other similar instruments.
    • Cash proceeds from issuing debentures, loans, notes, bonds, and other short-or long-term borrowings, and.
    • The cash repayments of amounts borrowed such as redemption of debentures, bonds, preference shares.
    Cash Flow Statement Explanation Classification and Objectives
    Cash Flow Statement: Explanation, Classification, and Objectives, #Pixabay.

    #Objectives of Cash Flow Statement:

    The primary objectives of the cash flow statement are to supply the necessary information relating to the generation of cash to the users of the financial statement. It also highlights the future or prospective cash positions i.e. cash or cash equivalent. The inflows and outflows of cash can represent with the help of this statement.

    The main objectives of the cash flow statement are:

    Measurement of Cash:

    Inflows of cash and outflows of cash can measure annually. Which arise from operating activities, investing activities and financing activities.

    Generating inflow of Cash:

    Timing and certainty of generating the inflow of cash can know. Which directly helps the management to take financing decisions in the future.

    Classification of activities:

    All the activities are classifying into operating activities, investing activities and financing activities. Which help a firm to analyze and interpret its various inflows and outflows of cash.

    Prediction of the future:

    A cash flow statement, no doubt, forecasts the future cash flows. Which help the management to take various financing decisions since synchronization of cash is possible.

    Supply necessary information to the users:

    A cash flow statement supplies various information relating to inflows and outflows of cash to the users of accounting information in the following ways:

    • Assess the ability of a firm to pay its obligations as soon as it becomes due.
    • Analyze and interpret the various transactions for future courses of action.
    • To see the cash generation ability of a firm, and.
    • Ascertain the cash and cash equivalent at the end of the period.
    Helps the management to ascertain cash planning:

    No doubt, a cash flow statement helps the management to prepare. Its cash planning for the future and thereby avoid any unnecessary trouble.

    Evaluation of future cash flows:

    Whether the cash flow from operating activities is quite sufficient in the future to meet the various payments e.g. payment of expense/debts/dividends/taxes.

    Assessing liquidity and solvency position:

    Both the inflows and outflows of cash and cash equivalent can know, and as such, liquidity and solvency position of a firm can also maintain as timing and certainty of cash generation knows i.e. It helps to assess the ability of a firm to generate cash.

    #Limitations of the Cash Flow Statement:

    Despite several uses, the cash flow statement suffers from the following limitations:

    • As the cash flow statements based on the cash basis of accounting. It ignores the basic accounting concept of accrual basis.
    • A cash flow statements, not a substitute for an income statement it is complementary to an income statement. Net cash flow does not mean the net income of a firm.
    • A cash flow statement is also not a substitute of funds flow statement which. Provides information relating to the causes that lead to an increase or decrease in working capital.
    • The comparative study of cash flow statements may give misleading results.
    • Some people feel that as working capital is a wider concept of funds. A funds flow statement provides a more complete picture than the cash flow statement, and.
    • Cash flow statements not suitable for judging the profitability of a firm as non-cash charges are ignored while calculating cash flows from operating activities.
  • Marketing Research Objectives, Advantages, and Limitations

    Marketing Research Objectives, Advantages, and Limitations

    What does Marketing Research mean? Define Marketing Research; “The systematic, objective and exhaustive search for the study of the facts relevant to any problem in the field of marketing.” You’ll understand Marketing Research and their best topics – Objectives, Advantages, and Limitations. Marketing research may describe as a method of getting facts to use by the executive in formulating policies and plans.

    The Concept of Marketing Research explains by its Objectives, Advantages, and Limitations.

    It can also be defined as the systematic gathering, recording and analyzing of data about problems relating to the marketing of goods and services. It’s a systematic search for information. It involves data collection, analysis, and interpretation. Research cannot draw decisions, but it helps marketers in the task of decision making.

    A successful executive will never depend upon guesswork. He looks for more accurate information through research. The main idea of marketing research is to know more about consumers, dealers, and products. As the business grows, the distance between the manufacturer and consumers also widens.

    The management depends upon marketing research as a tool in solving marketing problems. It helps in taking a fruitful and efficient decision as to the flow of goods and services in the hands of the customers.

    What is Market Research?

    Market research is an important element of the process of marketing research. They include a complete analysis of the market. Information regarding the nature, size, organization profitability of different markets, changes in markets and various factors-economic, social and political-affecting those changes are studied vigorously. The main purpose of market research is to know about the consumers and the markets of its products or services.

    This article has given a solution to understanding; Advantages and Limitations of Marketing Research, or Objectives and Limitations of Marketing Research, or Objectives and Advantages of Marketing Research.

    Objectives of Marketing Research:

    Marketing research is undertaken for attaining the following objectives:

    To Provide the Basis For Proper Planning: 

    Marketing and sales forecast research provides a sound basis for the formulation of all marketing plans, policies, programs, and procedures.

    To Reduce Marketing Costs: 

    They provide ways and means to reduce marketing costs like selling, advertisement, and distribution, etc.

    To Find Out New Markets for The Product: 

    Their aims at exploring new markets for the product and maintaining the existing ones.

    To Determine the Proper Price Policy:

    It is considered helpful in the formulation of proper price policy about the products.

    To Study in Detail Likes and Dislikes of the Consumers: 

    It tries to find out what the consumers, (the people of all genders who constitute the market) think and want. It keeps us in touch with the consumers, minds and to study their likes and dislikes.

    To Know The Market Competition: 

    They also aim at knowing the quantum of competition prevalent in the market about the product in question. The company may need reliable information about competitor’s moves and strategies which are of immense significance for further planning.

    To Study The External Forces and Their Impact: 

    They provide valuable information by studying the impact of external forces on the organization. External forces may include conditions developing in foreign markets, govt, policies and regulations, consumer incomes and spending habits, new products entering the market and their impact on the company’s products. External forces may include conditions developing in foreign markets, govt, policies and regulations, consumer incomes and spending habits, new products entering the market and their impact on the company’s products.

    Prof. Gilies has rightly pointed out that,

    “The basic objective of marketing research is to supply management with information which will lead to a fuller understanding of the distribution habits and attitudes of present and potential buyers and users, and their reactions to products, packing, selling and advertising methods.”

    Advantages of Marketing research:

    The following advantages of marketing research below are:

    Explains customer resistance:

    Research is useful for finding out customer resistance to the company’s products. Remedial measures are also suggested by the researcher to deal with the situation. This makes the product and marketing policies agreeable to consumers.

    Suggests sales promotion techniques

    Promotion Research; enables a manufacturer to introduce appropriate sales promotion techniques, select the most convenient channel of distribution, suitable pricing policy for the products and provision of discounts and concessions to dealers. They facilitate sales promotion.

    Offers guidance to marketing executives:

    To research, offers information and guidance to marketing executives while framing marketing policies. Continuous research enables a company to face adverse marketing situation boldly. It acts as an insurance against possible changes in the market environment.

    Facilitates the selection and training of the sales force:

    It is useful for the selection and training of staff in the sales organization. It also suggests the incentives which should be offered for the motivation of employees concerned with marketing.

    Promotes business activities:

    They enable a business unit to grow its activities. It creates goodwill in the market and also enables a business unit to earn high profits through consumer-oriented marketing policies and programs.

    Facilitates appraisal of marketing policies:

    Research activities enable business executives to have an appraisal of the present marketing policies in the light of findings of research work. Suitable adjustments in the policies are also possible as per the suggestions made by the researchers.

    Suggests new marketing opportunities:

    Research, suggests new marketing opportunities and how they can be exploited fully. It identifies emerging market opportunities.

    Facilitates inventory study:

    It is useful for the evaluation of the company’s inventory policies and also for the introduction of more efficient ways of managing inventories including finished goods and raw material.

    Provides marketing information:

    Research provides information on various aspects of marketing. It suggests the relative strengths and weaknesses of the company. Based on such information, marketing executives find it easy to frame policies for the future period. MR provides information, guidance and alternative solutions to current marketing problems.

    Provides information on product acceptance:

    They help in knowing the probability of acceptance of the product in its present form. It is also useful for the introduction of modifications in the existing product line of a firm.

    Creates a progressive outlook:

    Research generates progressive and dynamic outlook throughout the business organization. It promotes systematic thinking and a sense of professionalization within the company. It also creates enthusiasm among marketing executives. This brings success and stability to the whole business unit.

    Has wider social significance:

    Research is of paramount importance from the social angle. It is how the ultimate consumer becomes king of the market place, with his desires, prejudice and every whim transmitted to the producer and distributor. In brief, MR has a wider scope of significance. It is useful to all parties involved in the process of marketing.

    Limitations of Marketing Research:

    Now let’s discuss above listed limitations of marketing research.

    Limited scope:

    They solve many business-related problems. However, it cannot solve all business problems. It cannot solve problems related to consumer behavior, income and expenditure relationships, etc. Thus, its scope is limited.

    Costly in the Market:

    It is a costly affair. It needs a lot of money to conduct various market research activities. Huge funds are required to pay salaries, prepare questionnaires, conduct surveys, prepare reports, etc. It is not a viable choice for small businesses. It is suitable only for large companies who can afford its cost.

    Provides suggestions and not solutions:

    They provide data to the marketing manager. It guides and advises him. It also helps him to solve marketing problems. However, it does not solve the marketing problem. The marketing manager solves marketing problems. So, MR only provides suggestions. It does not provide solutions.

    Time-consuming:

    It is a lengthy and time-consuming process. This process involves many important steps. All these steps are crucial and not even a single step can be neglected or avoided. In other words, there are no short-cuts in MR. Generally, it takes at least three to six months to solve a marketing problem. Therefore, it cannot be used in urgent or emergencies.

    Limited practical value:

    They only an academic exercise. It is mainly based on a hypothetical approach. It gives theoretical solutions, it does not give real solutions to real-life problems. Its solutions look good on paper but are harder to implement in a real sense. Thus, it has limited practical value.

    Can’t predict consumer behavior:

    They collect data on consumer behavior. However, this data is not accurate because consumer behavior cannot be predicted. It keeps on changing according to the time and moods of the consumers. Consumer behavior is also very complex. It is influenced by social, religious, family, economic and other factors. It is very difficult to study these factors.

    No accurate results:

    It is not a physical science like physics, chemistry, biology, etc. They are also social science. It studies consumer behavior and marketing environment. These factors are very unpredictable. Therefore, it does not give accurate results. It gives results, but it cannot give 100% correct results.

    Non-availability of technical staff:

    It is done by researchers. The researchers must be highly qualified and experienced. They must also be hard-working, patient and honest. However, in India, it is very difficult to find good researchers. Generally, it is done by non-experienced and non-technical people. Therefore, MR becomes a costly, time-consuming and unreliable affair. So, its quality is also affected due to the non-availability of technical staff.

    Can be misused:

    Sometimes, marketing research is misused by the company. It is used to delay decisions, it is used to support the views of a particular individual. Also, used to grab power (managerial) in the company.

    Non-availability of reliable data:

    The quality of the marketing research report depends on the quality of the collected data. If the data is complete, up-to-date and reliable, then the MR report will also be reliable. However, in India, it is very difficult to get full, latest and trustworthy data. So, the non-availability of reliable data is also its limitation.

    The resistance of marketing managers:

    The marketing managers do not use the suggestions given in the marketing research report. Primarily, they feel that these suggestions are not practical. Secondly, they also feel that their importance will become less if they use these suggestions. There is a conflict between marketing managers and researchers.

    Fragmented approach:

    They study a problem only from a particular angle. Also, it does not consider an overall view. There are many causes of a marketing problem. It does not study all causes. It only studies one or two causes.

    For example, if there is a problem with falling sales. There are many causes for falling sales; like poor quality, high-price, competition, recession, consumer resistance, etc. It will only study two causes viz; low-quality and high price. It will not study other causes. So, it is not a reliable one.

  • Financial Control: Meaning Definition Objectives Importance

    Financial Control: Meaning Definition Objectives Importance

    What does mean Financial Control? Finance Control has now become an essential part of any company’s finances. It refers to the systems implemented in place to trace the directed resources of an organization with timely monitoring and measurement. So, what is the topic we are going to discuss; Financial Control – Meaning, Definition, Objectives, Importance, and Steps. Hence, it is very important to understand the meaning of financial control, its objectives and benefits, and the steps that must be taken if it is to implement correctly.

    The Concept of Financial Control explains – their Meaning, Definition, Objectives, Importance, and finally Steps.

    Exercising financial control is one of the important functions of a finance manager. Also, It aims at planning, evaluation, and coordination of financial activities to achieve the objective of the firm.

    Meaning and Definition of Financial Control:

    Control of financial activities carried out in an organization to achieve the desired objectives. They also provide a set of rules and regulations about the financial management systems followed in an organization.

    All organizations have financial controls to ensure effective financial management. Also, Most organizations have financial controls to ensure that everyone is aware of procedures to follow and to ensure that there is a better understanding of each one’s responsibility.

    The concept of Financial Control: It is concerned with the policies and procedures framed by an organization for manag­ing, documenting, evaluating and reporting financial transactions of an organization. In other words, they indicate those tools and techniques adopted by a concern to control its various finan­cial matters.

    Objectives of Financial Control:

    The main objectives of financial control discuss below:

    1] Economic Use of Resources:

    As well as, They aim to evaluate and coordinate financial activities. This helps prevent leakage of funds and thus desired returns on investments can realize.

    2] Preparation of Budget:

    They help the management prepare the budget for a particu­lar department. Also, Budgets provide a basis to compare actual performance with standard performance.

    3] Maintenance of Adequate Capital:

    It shows the way to maintain adequate capital, i.e. proper implementation of financial control verifies the adequacy of capital, and hence the evils of over-capitalization or under-capitalization can avoid.

    4] Maximization of Profit:

    As well as they compel the management to procure funds from cheaper sources and to apply the said funds efficiently to lead to profit maximization.

    5] Survival of Business:

    A good financial control system ensures proper utilization of resources, which creates a sound and strong base for an organization’s existence.

    6] Reduction in Cost of Capital:

    They aim at raising capital from cheaper sources by maintaining a proper debt-equity mix. So, the overall cost of capital remains at its lowest.

    7] Fair Dividend Payment:

    Their system aims to distribute a fair and adequate dividend to the investors thereby creating satisfaction among the shareholders.

    8] Strengthening Liquidity:

    One of the important objectives of financial control is to maintain the liquidity of the firm by exercising proper control over different components of the working capital.

    9] Checking that everything is running on the Right Lines:

    Sometimes, it just checks that everything is running well and that the levels set and objectives proposed at the financial level regarding sales, earnings, surpluses, etc., are being met without any significant alterations.

    The company thus becomes more secure and confident, its operating standards and decision-making processes being stronger.

    10] Detecting Errors or Areas for Improvement:

    An irregularity in the company finances may jeopardize the achievement of an organization’s general goals, causing it to lose ground to its competitors and in some cases compromising its very survival.

    Therefore, it is important to detect irregularities quickly. Various areas and circuits may also identify which while not afflicted by serious flaws or anomalies could improve for the general good of the company.

    11] Increase in Goodwill:

    A sound financial control system increases the productivity and efficiency of a firm. This helps in increasing the prosperity of the firm in the short run and its goodwill in the long run.

    12] Increasing Confidence of Suppliers of Funds:

    The proper, they prepare the ground to cre­ate a sound financial base of a firm and thereby increases the confidence of investors and suppliers.

    Financial Control Meaning Definition Objectives Importance and Steps
    Financial Control: Meaning, Definition, Objectives, Importance, and Steps. Image credit from #Pixabay.

    Importance of Financial Control:

    Finance is important for any organization and financial management is the science that deals with man­aging of finance; however the objectives of financial management cannot achieve without the proper controlling of finance.

    The importance of financial control discuss below:

    1] Financial Discipline:

    They ensure adequate financial discipline in an organization by efficient use of resources and by keeping adequate supervision on the inflow and outflow of resources.

    2] Coordination of Activities:

    As well as they seek to achieve the objectives of an organization by coordinating the activities of different departments of an organization.

    3] Ensuring Fair Return:

    Proper financial control increases the earnings of the company, which ulti­mately increases the earnings per share.

    4] Reduction in Wastages:

    Adequate financial control ensures optimal utilization of resources leav­ing no room for wastages.

    5] Creditworthiness:

    As well as they help maintain a proper balance between the debt collection period and the creditors’ payment period; thereby ensuring proper liquidity exists in a firm that increases the creditworthiness of the firm.

    The Steps of Financial Control:

    According to Henry Fayol,

    “In an undertaking, control consists in verifying whether everything occurs in conformity with the plan adopted, the instructions issued and principles established”.

    Thus, as per the definition of Fayol’s, the steps of financial control are:

    1] Setting the Standard:

    The first step in financial control is to set up the standard for every financial transaction of the concern. Standards should be set in respect of cost, revenue, and capital. Also, Standard costs should determine in respect of goods and services produced by the concern taking into account every aspect of costs.

    Revenue standard should fix taking into account the selling price of a similar product of the competitor, sales target of the year, etc. While determining capital structure, the various aspects like production level, returns on investment, cost of capital, etc., should take into account so that over-capitalization or under-capitalization can avoid.

    However, while setting up the standard, the basic objective of a firm, i.e. wealth-maximization, should take into account.

    2] Measurement of Actual Performance:

    As well as the next step in financial control is to measure the actual per­formance. For keeping records of actual performance financial statements should systematically prepare periodi­cally.

    3] Comparing Actual Performance with Standard:

    In the third step, actual performances compare with the pre-determined standard performance. The comparison should finish regularly.

    4] Finding Out Reasons for Deviations:

    If there are any deviations in the actual performance with the standard performance, the amount of variation or deviations should also ascertain along with the causes of the deviations. This should report to the appropriate authority for necessary action.

    5] Taking Remedial Measures:

    The last and final step in financial control is to take appropriate steps so that the gaps between actual performance and standard performance can bridge in the future, i.e. so that there is no deviation between actual and standard performance in the future. Read and share, Their Meaning, Definition, Objectives, Importance, and Steps in Hindi.

  • What is the top Objectives and Characteristics of Budget Control?

    Budget, Budgeting, and Budgetary Control: A budget is a blueprint of a plan expressed in quantitative terms. Budgeting is the technique for formulating budgets. Budgetary control, on the other hand, refers to the principles, procedures, and practices of achieving given objectives through budgets. So, what is the question we are going to discuss; What is the top Objectives and Characteristics of Budget Control?… Read in Hindi.

    Here are explained; Meaning, Definition, Nature, Objectives, and Characteristics of Budget Control.

    The word is given in Upper “Budget, Budgeting and Budgetary Control” Rowland and William have differentiated the three terms as: “Budgets are the individual objectives of a department, etc., whereas Budgeting may be said to be the act of building budgets. Budgetary control embraces all and in addition, includes the science of planning the budgets to effect an overall management tool for the business planning and control”.

    Meaning and Nature:

    Budgetary or Budget control is the process of determining various budgeted figures for the enterprises for the future period and then comparing the budgeted figures with the actual performance for calculating variances if any. First of all, budgets are prepared and then the actual results are recorded. The comparison of budgeted and actual figures will enable the management to find out discrepancies and take remedial measures at a proper time.

    The budgetary control is a continuous process which helps in planning and coordination. It provides a method of control too. A budget is a means and budgetary control is the end result.

    Definition:

    According to Brown and Howard,

    “Budgetary control is a system of controlling costs which includes the preparation of budgets. Coordinating the department and establishing responsibilities, comparing actual performance with the budgeted and acting upon results to achieve maximum profitability.” Wheldon characterizes budgetary control as ‘planning in advance of the various functions of a business so that the business as a whole is controlled’.

    J. Batty defines it as,

    “A system which uses budgets as a means of planning and controlling all aspects of producing and/or selling commodities and services.” Welch relates budgetary control with-day-to-day control process. According to him, ‘Budgetary control involves the use of budget and budgetary reports, throughout the period to coordinate, evaluate and control day-to-day operations in accordance with the goals specified by the budget’.

    From the above-given definitions it is clear that budgetary control involves the following:

    • The objects are set by preparing budgets.
    • The business is divided into various responsibility centers for preparing various budgets.
    • The actual figures are recorded.
    • The budgeted and actual figures are compared for studying the performance of different cost centers.
    • If actual performance is less than the budgeted norms, remedial action is taken immediately.

    Top three Objectives of Budget Control:

    The following points highlight the top three objectives of Budgetary control or Budget control. The objectives are:

    • Planning.
    • Co-Ordination, and.
    • Control.

    Now, explain;

    Planning:

    A budget is a plan of the policy to be pursued during the defined period of time to attain a given objective. The budgetary control will force management at all levels to plan in time all the activities to be done during future periods. A budget as a plan of action achieves the following purposes:

    • The action is guided by the well thought out plan because a budget is prepared after a careful study and research.
    • The budget serves as a mechanism through which management’s objectives and policies are affected.
    • It is a bridge through which communication is established between the top management and the operatives who are to implement the policies of the top management.
    • The most profitable course of action is selected from the various available alternatives.
    • A budget is a complete formulation of the policy of the undertaking to be pursued for the purpose of attaining a given objective.
    Co-Ordination:

    The budgetary control co-ordinates the various activities of the firm and secures co-operation of all concerned so that the common objective of the firm may be successfully achieved. It forces executives to think and think as a group. It coordinates the broader economic trends and the economic position of an undertaking. It is also helpful in coordinating the policies, plans, and actions. An organization without a budgetary control is like a ship sailing in a chartered sea. A budget gives direction to the business and imparts meaning and significance to its achievement by making the comparison of actual performance and budgeted performance.

    Control:

    Control consists of the action necessary to ensure that the performance of the organization conforms to the plans and objectives. Control of performance is possible with pre­determined standards which are laid down in a budget. Thus, budgetary control makes control possible by continuous comparison of actual performance with that of the budget so as to report the variations from the budget to the management of corrective action. Thus, the budgeting system integrates key managerial functions as it links top management’s planning function with the control function performed at all levels in the managerial hierarchy.

    But the efficiency of the budget as a planning and control device depends upon the activity in which it is being used. A more accurate budget can be developed for those activities where a direct relationship exists between inputs and outputs. The relationship between inputs and outputs becomes the basis for developing budgets and exercising control.

    The main objectives are stated below:

    • To determine business policies for the attainment of desired objectives during a particular period of time. It provides definite targets of performance and gives the guidance for the execution of activities and effort.
    • To ensures planning for future by setting up various budgets. The requirements and expected performance of the enterprise are anticipated.
    • To co-ordinate the activities of different departments.
    • To operate various cost centers and departments with efficiency and economy.
    • Elimination of wastes and increase in profitability.
    • To co-ordinate the activities and efforts of different departments in the enterprise so that the policies are successfully implemented.
    • To regulate the activities and efforts of people to ensure that the actual results conform to the planned results.
    • To operate various cost centers and departments with efficiency and economy.
    • To correct the deviations from the established standards, and to provide a basis for revision of policies.

    The Characteristics of Budget Control:

    The above definitions reveal the following characteristics of budgetary control:

    • Budgetary control presumes that management has made budgets for all departments/units of the enterprise and these budgets are summarised into a master budget.
    • Budgetary control needs the recording of the actual performance, its continuous comparison with the budgeted performance, and the analysis of variations in terms of causes and responsibility.
    • Budgetary control is a system suggesting suitable corrective action to prevent deviations in the future.

    The Characteristics of Good Budgeting:

    The following characteristics below are:

    • A good budgeting system should involve persons at different levels while preparing the budgets. The subordinates should not feel any imposition on them.
    • Budgetary control assumes the existence of forecasts and plans of the business enterprise.
    • There should be a proper fixation of authority and responsibility. The delegation of authority should be done in a proper way.
    • The targets of the budgets should be realistic, if the targets are difficult to be achieved then they will not enthuse the persons concerned.
    • A good system of accounting is also essential to make the budgeting successful.
    • The budgeting system should have whole-hearted support of the top management.
    • The employees should be imparted budgeting education. There should be meetings and discussions and the targets should be explained to the employees concerned.
    • A proper reporting system should be introduced, the actual results should be promptly reported so that performance appraisal is undertaken.
  • Financial Planning: Meaning, Definition, Objectives, and Importance

    Financial Planning: Meaning, Definition, Objectives, and Importance

    What is Financial Planning? Financial planning is an important part of financial management. A financial plan is an estimate of the total capital requirements of the company. It selects the most economical sources of finance. It also tells us how to use this finance profitably. The financial planning gives a total picture of the future financial activities of the company. It is the process of determining the objectives; policies, procedures, programmes, and budgets to deal with the financial activities of an enterprise. Financial planning is also known as capital planning. So, what we discussing is – Financial Planning: Meaning, Definition, Objectives, and Importance.

    The Concept of Financial Planning explains their key points into Meaning, Definition, Objectives, and Importance.

    In this article we Discuss; Financial Planning: Meaning of Financial Planning, Definition of Financial Planning, Objectives of Financial Planning, Need for Financial Planning, and the Importance of Financial Planning. Meaning and Definition: Financial planning reflects the needs of the business and is integrated with the overall business planning. Proper financial planning is necessary to enable the business enterprise to have the right amount of capital to continue its operations efficiently.

    Financial planning involves taking certain important decisions so that funds are continuously available to the company and are used efficiently. These decisions highlight the scope of financial planning. The financial plan is generally prepared during the promotion stage. It is prepared by the Promoters (entrepreneurs) with the help of experienced (practicing) professionals. The promoters must be very careful while preparing the financial plan. This is because a bad financial plan will lead to over-capitalization or under-capitalization. It is very difficult to correct a bad financial plan. Hence immense care must be taken while preparing a financial plan.

    #Definition of Financial Planning:

    Financial planning, also called budgeting, is the process of setting performance goals and organizing systems to achieve these goals in the future. In other words, planning is the process of developing business strategies and visions for the future. It’s big picture stuff. Financial Planning is the process of estimating the capital required and determining its competition. It is the process of framing financial policies in relation to procurement, investment, and administration of funds of an enterprise.

    #Objectives of Financial Planning:

    Financial planning is done to achieve the following two objectives:

    To ensure availability of funds whenever these are required:

    The main objective of financial planning is that sufficient fund should be available in the company for different purposes such as for the purchase of long-term assets, to meet day-to-day expenses, etc. It ensures timely availability of finance. Along with availability financial planning also tries to specify the sources of finance.

    To see that firm does not raise resources unnecessarily:

    Excess funding is as bad as inadequate or shortage of funds. If there is surplus money, financial planning must invest it in the best possible manner as keeping financial resources idle is a great loss for an organization.

    Others Financial Planning has got many objectives to look forward to:

    • Determining capital requirements; This will depend upon factors like the cost of current and fixed assets, promotional expenses and long-range planning. Capital requirements have to be looked with both aspects: short- term and long- term requirements.
    • Determining capital structure; The capital structure is the composition of capital, i.e., the relative kind and proportion of capital required in the business. This includes decisions of debt-equity ratio- both short-term and long-term.
    • Framing financial policies with regards to cash control, lending, borrowings, etc.
    • A finance manager ensures that the scarce financial resources are maximally utilized in the best possible manner at least cost in order to get maximum returns on investment.

    Financial Planning includes both short-term as well as the long-term planning. Long-term planning focuses on capital expenditure plan whereas short-term financial plans are called budgets. Budgets include a detailed plan of action for a period of one year or less.

    #Need for Financial Planning:

    The following financial planning below are:

    • Determine the financial resources required to meet the company’s operating programme.
    • Forecast the extent to which these requirements will be met by internal generation of funds and the extent to which they will be met from external sources.
    • Develop the best plans to obtain the required external funds.
    • Establish and maintain a system of financial control governing the allocation and use of funds.
    • Formulate programmes to provide the most effective profit-volume-cost relationships.
    • Analyze the financial results of operations, and.
    • Report facts to the top management and make recommendations on future operations of the firm.

    #Importance of Financial Planning:

    Sound financial planning is essential for the success of any business enterprise. It will provide policies and procedures to achieve close coordination between the various functional areas of business. This will lead to the minimization of wastage of resources. Management can follow an integrated approach to the formulation of financial policies, procedures, and programmes only if there is a sound financial plan.

    The important benefits of financial planning to a business are discussed below:

    • Financial planning provides policies and procedures for the sound administration of the finance function.
    • Financial planning results in the preparation of plans for the future. Thus, new projects could be undertaken smoothly.
    • Adequate funds have to be ensured.
    • Financial Planning helps in ensuring a reasonable balance between outflow and inflow of funds so that stability is maintained.
    • Financial Planning ensures that the suppliers of funds are easily investing in companies which exercise financial planning.
    • Financial Planning helps in making growth and expansion programmes which helps in long-run survival of the company.
    • Financial planning ensures required funds from various sources for the smooth conduct of business.
    • Uncertainty about the availability of funds is reduced. It ensures the stability of business operations.
    • Financial planning attempts to achieve a balance between the inflow and outflow of funds. Adequate liquidity is ensured throughout the year. This will increase the reputation of the company.
    • Cost of financing is kept to the minimum possible and scarce financial resources are used judiciously.
    • Financial planning serves as the basis of financial control. The management attempts to ensure utilization of funds in tune with the financial plans.
    • Financial Planning reduces uncertainties with regards to changing market trends which can be faced easily through enough funds, and.
    • Financial Planning helps in reducing the uncertainties which can be a hindrance to the growth of the company. This helps in ensuring stability and profitability in concern.

    Finance is the life-blood of the business. So financial planning is an integral part of the corporate planning of the business. Financial Planning is the process of framing objectives, policies, procedures, programmes and budgets regarding the financial activities of concern. This ensures effective and adequate financial and investment policies. All business plans depend upon the soundness of financial planning.

    Financial Planning Meaning Definition Objectives and Importance
    Financial Planning: Meaning, Definition, Objectives, and Importance. Image credit from #Pixabay.

  • Importance, Objectives, Advantages of Ratio Analysis

    Importance, Objectives, Advantages of Ratio Analysis

    What is the Meaning of Ratio Analysis? Ratio analysis refers to the analysis and interpretation of the figures appearing in the financial statements (i.e., Profit and Loss Account, Balance Sheet and Fund Flow statement, etc.). So, What we discussing is – Importance, Objectives, Advantages of Ratio Analysis. It is a process of comparison of one figure against another. It enables users like shareholders, investors, creditors, government, and analysts, etc. to get a better understanding of financial statements.

    The Concept of Accounting explains Ratio Analysis in the points of Importance, Objectives, Advantages.

    Definition of Ratio Analysis: Define the term ratio analysis as “The systematic use of ratios to interpret the financial statements so that the strengths and weaknesses of a firm, as well as its historical performance and current financial conditions, can determine.” Ratio analysis is a very powerful analytical tool useful for measuring the performance of an organization.

    Accounting ratios may just use as a symptom like blood pressure, pulse rate, body temperature, etc. The physician analyses this information to know the causes of illness. Similarly, the financial analyst should also analyze the accounting ratios to diagnose the financial health of an enterprise. In this article discussing Ratio Analysis: First Importance of Ratio Analysis, then second Objectives of Ratio Analysis, and finally Advantages of Ratio Analysis.

    Importance of Ratio Analysis:

    The following 10 best points of Importance of Ratio Analysis below are:

    Measure General Efficiency:

    Ratios enable the mass of accounting data to summarize and simplify. They act as an index of the efficiency of the enterprise. As such they serve as an instrument of management control.

    Measure Financial Solvency:

    Ratios are useful tools in the hands of management and other concerned to evaluate the firm’s performance over some time by comparing the present ratio with the past ones. They point out the firm’s liquidity position to meet its short-term obligations and long-term solvency.

    Forecasting and Planning:

    Ratio analysis is an invaluable aid to management in the discharge of its basic function such as planning, forecasting, control, etc. The ratios that are derived after analyzing and scrutinizing the past result, helps the management to prepare budgets to formulate policies and to prepare the plan of action, etc.

    Facilitate Decision-Making:

    It throws light on the degree of efficiency of the management and utilization of the assets and that is why it is called a surveyor of efficiency. They help management in decision-making.

    Corrective Action:

    Ratio analysis provides the inter-firm comparison. They highlight the factors associated with successful and unsuccessful firms. If the comparison shows an unfavorable variance, corrective actions can initiate. Thus, it helps the management to take corrective action.

    Intra Firm Comparison:

    Intra firm comparisons are facilitating. It is an instrument for the diagnosis of the financial health of an enterprise. It facilitates the management to know whether the firm’s financial position is improving or deteriorating by setting a trend with the help of ratios.

    Act as a Good Communication:

    Ratios are an effective means of communication and play a vital role in informing the position of and progress made by the business concern to the owners and other interested parties. The communications by the use of simplifying and summarize ratios are more easy and understandable.

    Evaluation of Efficiency:

    Ratio analysis is an effective instrument that, when properly used, is useful to assess important characteristics of business—liquidity, solvency, profitability, etc. A study of these aspects may enable conclusions to draw relating to the capabilities of the business.

    Effective Tool:

    Ratio analysis helps in making effective control of the business- measuring performance, control of cost, etc. Effective control is the keynote of better management. The ratio ensures secrecy.

    Detection of Unfavourable Factors:

    Analysis of financial statements enables the analyst to find out the soundness or otherwise of the business. If the analysis reveals financial unsoundness, the factors responsible for such unsoundness can separate and corrective action was taken without loss of time.

    The Objectives of Ratio Analysis:

    The main objectives of ratio analysis are to show a firm’s relative strengths and weaknesses. Other objectives of ratio analysis include comparisons for a useful interpretation of financial statements, finding solutions to unfavorable financial statements and to help take corrective measures when, in comparison to other similar firms, financial conditions and performance of the firm are unfavorable.

    Ratio analysis also determines the financial condition and financial performance of a firm. Using ratio analysis allows an analyst to determine the ability of the firm to meet its obligations, the overall operating efficiency, and performance of the firm and the efficiency with which the firm is utilizing its assets in generating sales.

    Ratio analysis is a tool used to conduct a quantitative analysis of information in a company’s financial statements. Ratios are calculated by individuals from current year numbers and are these numbers are then used to judge the performance of the company by comparing them to previous years, other companies, the industry or even the economy.

    Extra Knowledge:

    Ratio analysis can help give a quick indication of how a company is doing in certain key areas and the ratios can categorize as short-term solvency ratios, debt management ratios, asset management ratios, profitability ratios, and market value ratios. Ratio analysis should only use as the first step in financial analysis.

    As it is a tool that is based on accounting information, it can limit by any distortions that arise in financial statements due to historical cost accounting and inflation. It can also be difficult to draw comparisons using ratio analysis due to differences in the analysis made by other firms.

    Using ratio analysis can identify areas that may need to be investigating further. Some of the advantages of ratio analysis include that it helps in credit analysis, it can help in financial performance analysis and that it simplifies a financial statement.

    The basic important advantages of Ratio Analysis are also great.

    Ratio analysis is an important tool for analyzing the company’s financial performance. The following are the important advantages of the accounting ratios.

    Analyzing Financial Statements:

    Ratio analysis is an important technique of financial statement analysis. Accounting ratios are useful for understanding the financial position of the company. Different users such as investors, management. bankers and creditors use the ratio to analyze the financial situation of the company for their decision making purpose.

    Judging Efficiency:

    Accounting ratios are important for judging the company’s efficiency in terms of its operations and management. They help judge how well the company has been able to utilize its assets and earn profits.

    Locating Weakness:

    Accounting ratios can also use in locating the weakness of the company’s operations even though its overall performance may be quite good. Management can then pay attention to the weakness and take remedial measures to overcome them.

    Formulating Plans:

    Although accounting ratios are using to analyze the company’s past financial performance, they can also use to establish future trends of its financial performance. As a result, they help formulate the company’s plans.

    Comparing Performance:

    A company needs to know how well it is performing over the years and as compared to the other firms of a similar nature. Besides, it is also important to know how well its different divisions are performing among themselves in different years. Ratio analysis facilitates such comparison.

    Main Advantages of Ratio Analysis:

    Ratio analysis is widely used as a powerful tool for financial statement analysis. It establishes the numerical or quantitative relationship between two figures of a financial statement to ascertain the strengths and weaknesses of a firm as well as its current financial position and historical performance. It helps various interested parties to evaluate a certain aspect of a firm’s performance.

    The following 10 best points are the principal advantages of ratio analysis:

    Forecasting and Planning:

    The trend in costs, sales, profits, and other facts can know by computing ratios of relevant accounting figures for the last few years. This trend analysis with the help of ratios may be useful for forecasting and planning future business activities.

    Budgeting:

    The budget is an estimate of future activities based on experience. Accounting ratios help to estimate budgeted figures. For example, the sales budget may prepare with the help of an analysis of past sales.

    Measurement of Operating Efficiency:

    The analysis indicates the degree of efficiency in the management and utilization of its assets. Different activity ratios indicate operational efficiency. The solvency of a firm depends upon the sales revenues generated by utilizing its assets.

    Communication:

    Ratios are effective means of communication and play a vital role in informing the position of and progress made by the business concern to the owners or other parties.

    Control of Performance and Cost:

    Ratios may also use for control of performances of the different divisions or departments of an undertaking as well as control of costs.

    Inter-firm Comparison:

    A comparison of the performance of two or more firms reveals efficient and inefficient firms, thereby enabling inefficient firms to adopt suitable measures for improving their efficiency. The best way of inter-firm comparison is to compare the relevant ratios of the organization with the average ratios of the industry.

    The indication of Liquidity Position:

    They help to assess the liquidity position i.e., the short-term debt-paying ability of a firm. Liquidity ratios indicate the ability of the firm to pay and help in credit analysis by banks, creditors and other suppliers of short-term loans.

    The indication of Long-term Solvency Position:

    They also use to assess the long-term debt-paying capacity of a firm. The long-term solvency position of a borrower is a prime concern to the long-term creditors, security analysts and the present and potential owners of a business. It measures by the leverage/capital structure and profitability ratios which indicate the earning power and operating efficiency. Ratio analysis shows the strength and weaknesses of a firm in this respect.

    The indication of Overall Profitability:

    The management is always a concern with the overall profitability of the firm. They want to know whether the firm can meet. It is short-term as well as long-term obligations to its creditors, to ensure a reasonable return to its owners. And, secures optimum utilization of the assets of the firm. This is possible if all the ratios are considered together.

    The signal of Corporate Sickness:

    A company is sick when it fails to generate a profit continuously and suffers a severe liquidity crisis. Proper ratio analysis can give the signal of corporate sickness in advance. So, timely measures can take to prevent the occurrence of such sickness.

    Aid to Decision-making:

    They help to make decisions like whether to supply goods on credit to a firm. Whether bank loans will make available etc.

    Simplification of Financial Statements:

    They make it easy to grasp the relationship between various items and helps in understanding the financial statements.

    Importance Objectives Advantages of Ratio Analysis
    Importance, Objectives, Advantages of Ratio Analysis. Image credit from #Pixabay.

  • Objectives, Techniques, and Types of Financial Statement Analysis

    Objectives, Techniques, and Types of Financial Statement Analysis

    Types of Financial Statement Analysis; The financial statement of a business enterprise is intending to provide much of the basic data used for decision making, and in general, evaluation of performance by various groups such as current owners, potential investors, creditors, government agencies, and in some instance, competitors. Financial statements are the reports in which the accountant summarizes and communicates the basic financial data. The creditors are primarily interested in the liquidity of the company. The government interests 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. So, what we discussing is – Objectives, Techniques, and Types of Financial Statement Analysis.

    Cost Accounting explains the Objectives, Techniques, and Types of Financial Statement Analysis.

    In this article what discuss: Basic Objectives of Financial Statement Analysis, Main Objectives of Financial Statement Analysis, then Techniques of Financial Statement Analysis, and finally discussing the Types of Financial Statement Analysis. The following content is below: 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.

    Objectives and Importance of Financial Statement Analysis:

    The primary objective of financial statement analysis is to understand and diagnose the information contained in the financial statement to judge the profitability and financial soundness of the firm and to make the forecast about the prospects of the firm. The purpose of analysis depends upon the person interested in such an analysis and his object.

    However, the following purposes or objectives of financial statements analysis may state to bring out the significance of such analysis:

    • To assess the earning capacity or profitability of the firm.
    • To assess the operational efficiency and managerial effectiveness.
    • Assess the short term as well as long-term solvency position of the firm.
    • To identify the reasons for the change in profitability and financial position of the firm.
    • Make the inter-firm comparison.
    • Make forecasts about the prospects of the firm.
    • To assess the progress of the firm over some time.
    • Help in decision making and control.
    • Guide or determine the dividend action, and.
    • Provide important information for granting credit.

    Basic Objectives of Analysis and Explains:

    The users of financial statements have definite objectives to analyze and interpret. Therefore, there are variations in the objectives of interpretation by various classes of people.

    However, there are certain specific and common objectives which are listed below:

    • To interpret the profitability and efficiency of various business activities with the help of a profit and loss account.
    • Measure the managerial efficiency of the firm.
    • Measure the short-term and long-term solvency of the business.
    • Ascertain earning capacity in the future period.
    • Determine the future potential of the concern.
    • Measure the utilization of various assets during the period, and.
    • Compare the operational efficiency of similar concerns engaged in the same industry.

    Main Objectives of Financial Statement Analysis:

    The major objectives of financial statement analysis are to provide decision-makers with information about a business enterprise for use in decision-making. Users of financial statement information are the decision-makers concerned with evaluating the economic situation of the firm and predicting its future course.

    Financial statement analysis can use by different users and decision-makers to achieve the following objectives:

    Assessment of Past Performance and Current Position:

    Past performance is often a good indicator of future performance. Therefore, an investor or creditor is interested in the trend of past sales, expenses, net income, cash flow and return on investment. These trends offer a means for judging management’s past performance and are possible indicators of future performance.

    Similarly, the analysis of the current position indicates where the business stands today. For instance, the current position analysis will show the types of assets owned by a business enterprise and the different liabilities due to the enterprise. It will tell what the cash position is, how much debt the company has about equity and how reasonable the inventories and receivables are.

    Prediction of Net Income and Growth Prospects:

    The financial statement analysis helps in predicting the earning prospects and growth rates in the earnings which are using by investors while comparing investment alternatives and other users interested in judging the earning potential of business enterprises.

    Investors also consider the risk or uncertainty associated with the expected return. The decision-makers are futuristic and always concerned with the future. Financial statements that contain information on past performances are analyzing and interpret as a basis for forecasting future rates of return and for assessing risk.

    Prediction of Bankruptcy and Failure:

    Financial statement analysis is a significant tool in predicting the bankruptcy and failure probability of business enterprises. After being aware of probable failure, both managers and investors can take preventive measures to avoid/ minimize losses. Corporate management can effect changes in operating policy, reorganize financial structure or even go for voluntary liquidation to shorten the length of time losses.

    In the accounting and finance area, empirical studies conducted have suggested a set of financial ratios that can give an early signal of corporate failure. Such a prediction model based on financial statement analysis is useful for managers, investors, and creditors. Managers may use the ratios prediction model to assess the solvency position of their firms and thus can take appropriate corrective actions.

    Investors and shareholders can use the model to make the optimum portfolio selection and to bring changes in the investment strategy by their investment goals. Similarly, creditors can apply the prediction model while evaluating the creditworthiness of business enterprises.

    Loan Decision by Financial Institutions and Banks:

    Financial statement analysis uses by financial institutions, loaning agencies, banks, and others to make a sound loan or credit decision. In this way, they can make the proper allocation of credit among the different borrowers. Financial statement analysis helps in determining credit risk, deciding the terms and conditions of the loan if sanctioned, interest rate, maturity date, etc.

    Techniques of Financial Statement Analysis:

    Various techniques are using in the analysis of financial data to emphasize the comparative and relative importance of data presented and to evaluate the position of the firm.

    Among the more widespread use of these techniques are the following:

    • Horizontal Analysis.
    • Vertical Analysis.
    • Trend Analysis.
    • Ratio Analysis.
    • Cash flow analysis.
    • Funds flow analysis.
    • Comparative financial statements.
    • Common measurement or size statements, and.
    • Net Working capital analysis.

    Now, explain each;

    Horizontal Analysis:

    The percentage analysis of increases and decreases in corresponding items in comparative financial statements calls horizontal analysis. The horizontal analysis involves the computation of amount changes and percentage changes from the previous to the current year.

    The amount of each item on the most recent statement compares with the corresponding item on one earlier statement. The increase or decrease in the amount of the item is then listed, together with the percent of increase or decrease. When the comparison makes between two statements, the earlier statement uses as the base.

    If the horizontal analysis includes three or more statements, there are two alternatives in the selection of the base. First, the earliest date or period may use as the basis for comparing all later dates or periods or second, each statement may compare with the immediately preceding statement.

    The percent change computes as follows:

    Percentage change = Amount of change/Previous year amount x 100.

    Vertical Analysis:

    The analysis uses percentages to show the relationship of the different parts to the total in a single statement. Vertical analysis sets a total figure in the statements equal to 100 percent and computes the percentage of each component of that figure. The figure to use as 100 percent will be total assets or total liabilities and equity capital in the case of the balance sheet and revenue or sales in the case of the profit and loss account.

    Trend Analysis:

    Using the previous year’s data of a business enterprise, trend analysis can finish observing percentage changes over time in selected data. In trend analysis, percentage changes are calculating for several successive years instead of between two years. Trend analysis is important because, with its long-run view, it may point to basic changes like the business.

    By looking at a trend in a particular ratio, one may find whether that ratio is falling, rising or remaining relatively constant. From this observation, a problem is detecting or the sign of good management is found. Trend analysis uses an index number over some time. For index number, one year, the base year is equal to 100 percent. Other years are measuring that amount. For example, an analyst may interest in sales and earnings trends for the past five years.

    For this purpose, the sales and earnings data of a company are given to prepare further the trend analysis or percentages. The above data show a fairly healthy growth pattern but the pattern of change from year to year can determine more precisely by calculating trend percentages. To do this, a base year selects and then the data are divided for each of the other years by the base year data.

    Ratio Analysis:

    Ratio analysis is an important means of expressing the relationship between two numbers. A ratio can compute from any pair of numbers. To be useful, a ratio must represent a meaningful relationship, but the use of ratios cannot take the place of studying the underlying data.

    Ratios are guides or shortcuts that are useful in evaluating the financial position and operations of a company and in comparing them to previous years or other companies. The primary purpose of ratios is to point out areas for further investigation. They should use in connection with a general understanding of the company and its environment. Comparison of income statement and balance sheet numbers, in the form of ratios, can create difficulties due to the timing of the financial statements.

    Specifically, the profit and loss account covers the entire fiscal period, whereas the balance sheet is for a single point in time, the end of the period. Ideally then, to compare an income statement figure such as sales to a balance sheet figure such as receivable, we usually need a reasonable measure of average receivables for the year that the sales figure covers.

    However, these data are not available to the external analyst. In some cases, the analyst should take the next best approach, by using an average of beginning and ending balance sheet figures. This approach smoothes out changes from beginning to end, but it does not eliminate the problem due to seasonal and cyclical changes. It also does not reflect changes that occur unevenly throughout the year.

    Cash flow Analysis:

    Cash flow analysis depicts the inflows and outflows of cash. The cash flow statement is the device for such an analysis. It highlights causes that bring changes in cash position between two balance sheet dates.

    Funds Flow Analysis:

    Funds flow statement signifies the sources and applications of funds. The term ‘funds’ refers to working capital. Funds flow analysis clearly shows internal and external sources of working capital and the way funds have been using. Funds flow derives from analysis of changes that have taken place in assets and equities between two balance sheet dates.

    According to Foulke,

    “A statement of sources and application of funds is a technical device design to analyze the changes in the financial position of a business concern between two periods.”

    Funds flow analysis helps judge creditworthiness, financial planning, and budget preparation.

    Comparative Financial Statements:

    This is yet another technique used in financial statement analysis. This is statements summarize and present related data for several years. Incorporating therein changes (absolute and relative) in individual items of financial statements.

    The statements normally comprise comparative balance sheets, comparative profit, and loss account. And, comparative statements of change in total capital as well as in the working capital. Also, these statements help in making inter-period and inter-firm comparisons and also highlight. The trends in performance efficiency and financial position.

    Common Size Statements:

    Common size statements indicate the relationship of various items with some common items, (expressed as a percentage of the common item). In the income statements, the sales figure takes as the basis and all other figures are expressing as a percentage of sales.

    Similarly, in the balance sheet, the total assets and liabilities are taking. As the base and all other figures are expressing as the percentage of this total. The percentages so calculate are comparing with corresponding percentages in other periods or other firms and meaningful conclusions are drawn. Generally, a common size income statement and common size balance sheet are preparing.

    Networking Capital Analysis:

    Networking capital statement or schedule of changes in working capital prepares to disclose net changes in working capital on two specific dates (generally two balance sheet dates). It is preparing from current assets and current liabilities on the specified dates to show a net increase or decrease in working capital.

    Types of Financial Statement Analysis:

    The process of financial statement analysis is of different types. The process of analysis is classifying based on information use and “Modus Operandi” of analysis.

    The classification is as under – (1) based on Information:

    External Analysis:

    This analysis is base on published the financial statements of a firm. Outsiders have limited access to internal records of the concern. Therefore, they depend on publishing financial statements. Thus, the analysis done by outsiders namely, creditors, suppliers, investors, and government agencies knows as external analysis. This analysis serves a very limited purpose.

    Internal Analysis:

    This analysis is done based on internal and unpublished records. It is done by executives or other authorized officials. It is very much useful and significant to employees and management.

    (2) Based on “Modus Operandi” of Analysis:

    Horizontal Analysis:

    This analysis is also known as ‘dynamic’ or ‘trend’ analysis. The analysis is done by analyzing the statements for several years. According to John N. Myer, “the horizontal analysis consists of a study of the behavior of each of the entities in the statement”. Thus, under horizontal analysis, we study the behavior of each item shown in the financial statements.

    We examine as to what has been the periodical trend of various items shown in the statements i.e., whether they have to increase or decrease over some time. If the comparative statements are preparing for more than two periods, then one of the years takes as a basis to calculate the percentage of increase or decrease. Some analysts prefer to choose the earliest year as the basis, while some others prefer to take just the preceding year as the basis.

    Vertical Analysis:

    The analysis also knows as ‘static analysis’ or ‘structural analysis’. This analysis makes based on a single set of financial statements preparing on a particular date. Under vertical analysis, the quantitative relationship is establishing between different items shown in particular statements. Common-size statements are a form of vertical analysis. Different items shown in the statement are expressing as a percentage to any one item as the base. The use of both methods of analysis is very much requiring for proper analysis. Each method provides a specific type of information and in fact, both methods constitute the backbone of financial analysis.

    Objectives Techniques and Types of Financial Statement Analysis
    Objectives, Techniques, and Types of Financial Statement Analysis. Image credit from #Pixabay.

  • Meaning, Nature, and Importance of Capital Expenditure Decisions

    Meaning, Nature, and Importance of Capital Expenditure Decisions

    It is the planning, evaluation, and selection of capital expenditure proposals, the benefits of which are expected to accrue over more than one accounting year. Capital expenditure decisions are just the opposite of operating expenditure decisions. Decisions involving the acquisition of machinery, vehicles, buildings, or land are examples of such decisions. So, what is discusses are: Meaning, Nature, and Importance of Capital Expenditure Decisions.

    The Concept of Capital Expenditure Decisions is explaining in Meaning, Definition, Nature, Objectives, Difficulty, and Importance.

    What is Capital Expenditure? A capital expenditure is the use of funds by a company to acquire physical assets to improve its value or increase its long-term productivity. Also known as capital expenses, capital expenditures include purchases such as buildings or warehouses, new equipment such as machinery or computers, and business vehicles. Many companies strive to maintain their historical capital expenditure levels in order to show investors that managers are investing adequately in the business.

    Much of the discussion has focused on decisions relating to near-term operations and activities. But, managers must also ponder occasional big-ticket expenditures that will impact many years to come. The decision on long-term investments is quite pivotal due to many reasons. It is a part of the duties of an entity’s key management to affect most accurate the decision with respect to the long-term investments. The question of decisions is: What is the concept of financial decisions?

    Such capital expenditure decisions relate to the construction of new facilities, large outlays for vehicles and machinery, embarking upon new product research and development, and similar items where the upfront cost is huge and the payback period will span years to come. A number of business factors combine to make business investment perhaps the most important financial management decision.

    Meaning of Capital Expenditure Decisions:

    The capital expenditure decision is the process of making decisions regarding investments in fixed assets which are not meant for sale such as land, building, plant & machinery, etc. Thus it refers to long-term planning for proposed capital expenditures and includes raising of long-term funds and their utilization. The key function of the finance manager is the selection of the most profitable project for invest­ment. This task is very crucial because any action taken by the manager in this area affects the working and profitability of the firm for many years to come.

    Definition of Capital Expenditure Decisions:

    Former is generally termed as ‘current’ expenditure and is ex­pected to result in benefits in a short period of less than a year. The latter is termed as ‘capital’ expenditure, and is expected to result in benefits in the future period of one or more years and is also known as capital budgeting decisions. Capital Expenditure Decisions Managers in all organizations periodically face major decisions that involve cash flows over several years. Decisions involving the acquisition of machinery, vehicles, buildings, or land are examples of such decisions.

    Although the tendency is to focus on the financial dimensions, such decisions are made even more complex because they usually involve a number of nonfinancial components as well. Thus, the final decision may involve consideration of architectural, engineering, marketing, regulatory, and numerous other variables.

    These types of decisions involve considerable risk because they usually involve large amounts of money and extended durations of time. In addition, capital expenditure decisions (also called capital budgeting) are usually accompanied by a number of alternatives from which to choose. Sometimes, an option that is best in the long term may be the least desirable in the near term and vice versa.

    Nature of Capital Expenditure Decisions:

    Capital expenditure decisions involve the acquisition of assets that have a long life span and which provide benefits spread over a long period of time.

    The nature of capital expenditure decisions can be explained in brief as under:

    • Irreversible Decision: Capital expenditure decisions once approved represent long-term invest­ments that cannot be reversed or withdrawn at any time. Withdrawal or reversal of such decisions may lead to considerable financial losses to the firm.
    • Maximization of Shareholder’s Wealth: It helps protect the interest of the shareholders as well as of the firm because it avoids over-investment and under-investment in fixed assets.
    • Substantial Investments: Capital expenditure decisions involve large amounts of funds. Such decisions have its effect over a long span of time.
    • Estimation of Future Cash Inflows: Preparation of capital expenditure budget involves forecast­ing of cash inflows over several years for evaluating the profitability of projects.

    Objectives of Capital Expenditure Decisions:

    Financing decisions are one of the most crucial and critical decisions of a firm as they have a significant impact on the profitability of the firm.

    There is the number of objectives of capital expenditure decisions, some of which are:

    • Cost Reduction: The existence of a firm depends on profitability, which in turn depends on the production of goods or services at a reasonable price. This is possible if over/under-investment in fixed assets is avoided.
    • Providing Contemporary Goods: Consumer tastes change every day. To satisfy the new demands from customers, either proper utilization of existing facility or installation of the latest machinery is necessary—which is not possible without proper capital expenditure decision.
    • Increasing Output: An output may be increased by utilizing the existing facility or through expansion by installing new plant and machinery.

    The Importance of Capital Expenditure Decisions:

    Here are understand about the importance of Capital expenditure and also know their Difficulty.

    The following importance is:
    • Effects in the Long Run: the consequences of capital expenditure decisions extend into the feature. The scope of current manufacture activities of a company governed largely by capital expenditures in the past. Likewise, current capital expenditure decisions provide the framework for future activities. Capital investment decisions have an enormous bearing on the basic character of a company.
    • Irreversibility: The market for used capital equipment, in general, is ill-organized. Further, for some types of capital equipment, custom-made to meet the specific requirement, the market virtually be non-existent. Once such equipment is acquired, reversal of decision may mean scrapping the capital equipment. Thus, a wrong capital investment decision cannot be reversed without incurring a substantial loss.
    • Substantial outlays: Capital expenditures usually involve substantial outlays. An integrated steel plant, for example, involves an outlay of several thousand million. Capital costs tend to increase with advanced technology.
    The following difficulty is:
    • Measurement problems: Identifying and measuring the costs and benefits of a capital expenditure proposal tends to be difficult. This is more so when a capital expenditure has a bearing o some other activities of the company like cutting into sales of some existing product or has some intangible consequences like improving the morale of workers.
    • Uncertainty: A capital expenditure decision involves costs and benefits that extend far into the future. It is impossible to predict exactly what will happen in the future. Hence, there is usually a great deal of uncertainty characterizing the costs and benefits of a capital expenditure decision.
    • Temporal Spread: The costs and benefits associated with a capital expenditure decision are spread out over a long period of time, usually 10-20 years for industrial projects and 20-50 years for infrastructural projects. Such a temporal spread creates some problems in estimating discount rates and establishing equivalence.

    Capital Expenditure Decisions Managers in all organizations periodically face major decisions that involve cash flows over several years. Decisions involving the acquisition of machinery, vehicles, buildings, or land are examples of such decisions. Other examples include decisions involving significant changes in a production process or adding a major new line of products or services to the organization’s activities.

    Decisions involving cash inflows and outflows beyond the current year are called capital-budgeting decisions. Managers encounter two types of capital-budgeting decisions. Acceptance-or-Rejection Decisions In acceptance-or-rejection decisions, managers must decide whether they should undertake a particular capital investment project. In such a decision, the required funds are available or readily obtainable, and management must decide whether the project is worthwhile.

    Meaning Nature and Importance of Capital Expenditure Decisions
    Meaning, Nature, and Importance of Capital Expenditure Decisions. Image credit from #Pixabay.