Goals and objectives of finance in business

Finance-iACT-GlobalAll businesses in today’s world have one objective in mind – to make money. Irrespective of the size of the organization all businesses are running with the objective of making profits. Goals and objectives of finance in business are to ensure that the organisation achieve its goals of making money by ensuring that the organization as a whole achieve other objectives as well. Other objectives important for the organisation are process, production, people and promotion maximization. Once an organisation ensures that these objectives are met it results in profit for the organisation.

Generally the goals and objectives of finance in business are

Return on Investment- Every business is funded by investment and its imperative for business that the investment grows in the business so that the business can make money. Return on Investment is a financial ratio applied to capital expenditure. The ROI ratio is concerned with two aspects first is the capital investment in terms of property, machinery and vehicles. It’s the objective of the business to generate enough money through these capital investments to justify their purchase cost. Secondly, ROI is also concerned with investments in stocks, bonds and other investment instruments

  • Increasing Revenue Growth – The most basic objective of any business is to increase the revenue. Increasing revenue is achieved by increasing sales and marketing activities. The focus is on top line earnings, which is concerned with earnings before expenses. Most organizations look at setting a percentage increase goal and work hard for achieving that objective.
  • Profit Margins– Profit is concerned with the bottom line earnings. Profit is basically the revenue generated over the sales revenue after deducting the expenses. This Profit can be used to invest in the expansion of the business and also for can be used for distribution among the employees as part of a profit sharing arrangement. Profit goals of an organization are concerned with revenue making sure that the cost are kept low by acquiring raw material at lower price or keeping the cost of production low in order to increase the profit margins.
  • Sustainability – Its also an objective of finance in business to sustain itself in times of economic crisis and turbulence. This objective can be achieved by keeping the debts really low and maintaining consistent income levels.

iACT Global is a education and training organization which helps businesses in achieving financial goals and objectives by providing various Financial management courses which can contribute to long term growth oriented strategy for the business. Enroll now!

Corporate Finance: Nature and Scope

CF_iACT_GlobalMost of you, who are familiar with Corporate Finance, must be aware that corporate finance is nothing but managing the required funding and its sources. CF is also concerned with overseeing and optimizing the proficiencies of the capital structure to enhance the value of the company. One of the main objectives of corporate finance is to maximize the shareholder value in both short and long term. Let’s find out about the nature and scope of CF.

Scope of Corporate Finance

Capital investment decisions are an important part of corporate finance. These decisions include

  • Deciding whether the dividends should be offered to shareholders or not
  • Sanctioning or rejecting proposed investment. If the investment is approved, it is also to be decided whether the company should pay with debt of equity or both.
  • Managing of short term assets and liabilities, investments, inventory control and other short term financial issues by the financial manager

Corporate finance understands the financial problems of a company and prevents them beforehand. It also deals with the financial aspects, promotion and administration of new enterprises.

Nature or Principles of Corporate Finance:

Corporate finance is based on the following three principles:

  • The Investment Principle: According to this principle, the funds of an organization should be invested in such a way to derive maximum return on investment. This investment should be made at acceptable and minimum hurdle rate which depends on the project’s debt and equity. The riskier the project is; the higher will be the hurdle rate.
  • The Financing Principle: According to this principle, one should choose the ratio of debts and equity in such a way so as to attain maximum return on investment and to match the assets’ financial nature. The corporate finance manager has to analyze how to attain the optimum financial mix of debt and equity for the organization.
  • The Dividend Principle: According to this principle, when a business reaches a saturation point where cash flow surpasses the required fund, the corporate finance manager needs to search for alternative sources like dividends, stocks and assets to maintain a balance between the cash flow and required funds.

Thus, after knowing so much about CF, you must be more than eager to enroll for CF Certification at iACT Global. iACT Global is just the place for your dreams to come true. Through iACT Global you can study at your own convenience anywhere and at anytime. So, just enroll now!

After Demonetisation What Next?

demonetisationThe buzz word is around and making news every nook and corner of the town. Let’s find out some bare facts pertaining to the ‘Demonetization’ phenomenon. Demonetization (Demo’) refers to an economy being replaced by its existing currency followed by channelization of new currency.  So it is more like invalidating the current legal tender. Generally, for ensuring smooth switch over old currencies are allowed to be converted in to the new ones. If we look for examples, European Monetary Union nations agreed to take Euro as their currency. Other countries that went for demonetization included – Philippines, Zimbabwe, Singapore and Fiji.

The ones at the pedestal of the pyramid are using currency primarily to meet their daily needs. The informal sector of the economy like daily wage earners, small traders, laborers tend to use cash frequently. Lack of liquid cash deprives them of their income. The labor cost would be curtailed in case of cash stringency.  Nearly 86% of the circulating currency consisting of Rs.500 and Rs.1000 notes was withdrawn. This withdrawal didn’t have any bulk replacement. The available denomination, immediately after withdrawal was Rs 2000. This made Rs. 2000 more as a store currency rather than as a transaction currency.

Let’s Assess The Impact On Some Of The Sectors Of Indian Economy

Real Estate: Starting with Real estate, a fall in the enquiries to the extent of 40% is witnessed. The secondary market is also stagnant, buyers and sellers are in –‘Wait and watch’ mode.

Auto: The sales at wholesale level suffered less of shock in comparison to the retail sales; however in the two-wheeler rural markets where cash is the primary mover, a sharp decline happened. Telecom: Demand for Smart phones along with the ordinary was hit. Fall in Shipments and inventory pile up signaled the same.

Agriculture: Villages adapted with the demo’ move better, the tax incentive to the tune of 20% offered by GOI further strengthened the situation. Crop planting rather increased w.r.t. previous weeks.

Metals: Construction and Building Infra where steel and other metals like aluminum, zinc etc are used will be adversely impacted, owing to a hit on the real estate sector.

Aviation: One of the world’s fastest growing markets will have a drop in the level of sales. Small town flights where cash is one of the key ingredients may experience negative growth. Falls in bookings were notified post demonetization move.

Tourism: The crest season of November-December were hit badly by the move. Shortage of cash at hotels and airports made the situation worse. Lack of acceptance of credit cards and other payment alternatives at historical sites and monuments made visitors face odds.

Consumer Spending: Organized retails fared better. Impulse and personal product purchased suffered badly. Analysts say – It may take tenure of two quarters to improve the situation.

E-Commerce: Food delivery ventures and grocery store are doing usual. GMV (Gross Merchandise Value) fell by 40% to 50%.

Now looking forward to some solutions- Low interest housing loans with a fall in the corporate tax rate to the tune of 25% may boost the sentiments. Then a surge in the public sector investments may add to the push. The budget could act as a ‘good signal’.

Financial Risk and its Types

financial risk management One of the major concerning factors for all types of businesses across the world is financial risk management. This is the main reason behind the popularity of the Financial Risk Manager Exam. If you are also keen to take this exam, you must know about what is meant by risk and what its various types are. Hence, let’s study about financial risks and its type through this blog.

Definition of Financial Risk

You must be aware that risk can be defined as the possibility of having negative or unexpected results. A firm may have to tackle different types of risk. Broadly speaking, there are three types of risks: financial risk, business risk and non-business risk.

In this blog, we will focus only on financial risk. For every business, financial risk is the highest priority risk. Market movements are the main cause of financial risk. If you enroll at IACT Global for Financial Risk Management course, you will come to know more about these market movements. There are different types of financial risks like credit risk, operational risk, market risk, legal risk and liquidity risk. Let’s discuss each one of them in detail.

  1. Credit Risk: When you fail to complete counter parties’ obligations, this gives rise to this kind of risk. Credit risk can be further divided into:
    • Sovereign Risk: This risk is caused due to tough foreign exchange policies.
    • Settlement Risk: This risk is caused due to failure of a party to meet its obligations while the other party makes timely payment.
  2. Operational Risk: This risk is caused due to technical failures or mismanagement. It is divided into
    • Fraud Risk: This arise due to absence of controls
    • Model Risk: This is caused due to wrong model application.
  3. Market Risk: Price movements cause this type of risk. Market risk can be further classified into:
    • Directional Risk: This risk is caused due to movement in interest rates, stock price etc.
    • Non-Directional Risk: This risk includes volatility risk.
    • Legal Risk: This risk is caused due to lawsuits and legal proceedings.
  4. Liquidity Risk: This risk is caused when you are unable to implement transactions. It is of two types:
    • Asset Liquidity Risk: This risk arises when assets are converted into cash during sudden cash requirement.
    • Funding Liquidity Risk: This is caused due to daily cash flow.
    • After going through these risks, you must be keen to take up the Financial Risk Management course. You can easily register at IACT Global and get Financial Risk Management certification. At IACT Global, you can pursue learning anywhere, anytime.

Banking and too many jobs in the rural areas!

006ruralA number of jobs are going to be created in the banking sector in the coming days. This will happen as the government and Reserve Bank of India push the initiative to increase financial inclusion in India. Much of the growth of banking sector will now take place in rural areas as lack of financial inclusion is maximal in the rural parts of the country.

Therefore banks will give preference to those candidates who are willing to work in the rural parts. The rural parts of the country suffer from many infrastructural bottlenecks such as shortage of electricity.  Those who have grown up in cities often find it difficult to work in rural parts because of these infrastructural problems. On the other hand those who have grown up in rural areas are well-adjusted to living in these areas. Candidates coming from the rural parts, therefore, have a big opportunity for getting hired in the banking sector in the near future.

Recently, the Reserve Bank of India gave two new banking licenses. One of these licenses was given to Bandhan.  Bandhan, headquartered in Kolkata, is already the country’s biggest Microfinance Institution (MFI). An MFI gives small loans, usually in the range of Rs 100 to Rs 10000, to poor customers without asking for any security. In turn the MFI charges a slightly higher interest rate than banks, to cover the risk of lending to poor people, without any security.

Bandhan has been extremely successful as an MFI. Its MFI business is now worth more than Rs 10000 crore. Now as Bandhan graduates to a full bank, it has said that its focus will remain on the rural markets. Its core competency now lies in operating in the rural parts, as it understands well the challenges of these parts of the country. Bandhan will open majority of its banking branches in these rural parts.  It is in the process of hiring more people who are willing to work in its bank branches in the rural parts.

In such a scenario knowledge of banking & financial services operations is a very valuable skill. Those coming from the rural parts can increase their employability quotient by getting trained in the operations of banking & financial services.

Risk, Risk, Risk – Learn to manage risk

AAEAAQAAAAAAAAJ4AAAAJGFkMThhZWI4LTAzN2MtNDg2Mi1iYjY4LTRhNmQ4NTI3MTFjNAThe contemporary business environment is a highly dynamic one. Constant changes in the external environment have increased the risks that businesses face. Risk management has therefore become more important than ever.

Key risks that a business faces are operational risks and financial risks. Operational risks are those that arise from the nature of operations of a business. For instance a sudden, unexpected shortage of raw materials for your business is an operational risk. Sudden, unexpected fall in the prices of the products or services of your business is another operational risk. Occupational hazards to which workers of a business are exposed to are also an operational risk.

Operational risks can be managed by constantly monitoring the external and internal environment. Scenario analysis should be done to plan for a business’ response in the case of materialization of a possible operational risk scenario. Operational risks such as fire in plants and facilities can be managed through adequate insurance. Unfortunately, majority of businesses are under-insured. Many small businesses operate without any kind of insurance.

Financial risks before a business are of many types. A business involved in exports and imports faces foreign exchange risk. This risk means loss in the value of revenues or assets or increase in the value of liabilities due to sudden, unexpected movements in foreign exchange rate. For instance a company exporting mangoes from India to America earns its revenues in dollars, which it then converts to rupees. If the dollar depreciates against the rupee then the revenue of this company in rupee terms will go down. Such type of currency risk can be managed through the technique of hedging.

Credit risk is another type of risk that can be classified as a financial risk for a business. Credit risk means that the debtor of your business may fail in paying off its debt obligation when it becomes due. A lot of sales – especially in business-to-business (B-2-B) segment – are credit sales. Therefore credit risk is high in these cases.

Market risk means that the value of an investment will decrease because of adverse movements in market prices. Businesses keep their cash reserves invested in various investment schemes and securities and are therefore exposed to market risk.

Then there is the financial risk of insolvency. Risk of insolvency means a business or individual getting insolvent because of its inability to pay off its debt or financial obligations when they become due.

Both small and large businesses should focus on making their risk management more effective. Poor risk management by banks and many large companies was the main reason for the 2008 financial crisis.

Payments Banks – An intelligent idea indeed!

BFThe Reserve Bank of India recently gave licenses to eleven entities to start payments banks. These entities include Aditya Birla Nuvo, Reliance Industries, Tech Mahindra, Vodafone M-Pesa etc. A payments bank is a very unique concept that has originated in India.

 A payments bank means a bank that can accept deposits from public but it cannot lend to public. A usual bank both accepts deposits and lends too. A payments bank can also accept remittances. Remittances are money that you transfer to the bank account of your friend, family members or others. So a labourer working in a city can transfer money to the bank account of his wife, living in village, through the payments bank.

The purpose of creating payments bank is to increase financial inclusion in India. Financial inclusion is measured by the percentage of population that has access to bank accounts and banking services. The financial inclusion in India is dismally low. According to a recent World Bank study, financial inclusion in India stands at just 35%. This means that only 35% of Indian population right now has bank accounts and access to banking services.

The central government and RBI have made increasing financial inclusion their top priority.  Much of lack of financial inclusion is in rural areas.  Payments banks will have to maintain at least 25% of their branches in rural areas. This will give people living in these areas access to bank accounts. They can deposit their cash in these bank accounts and earn some interest on it.

How will payment banks earn their income if they are not allowed to lend? Traditional banks mainly earn their income from the difference of the interest that they charge on loans and the interest that they pay on their deposits. Payments banks will invest their deposits in government securities. They will earn interest on these securities. Part of these interests they will pay to the depositors, while the remaining they will retain as their income. They may also charge some amount for remittance transfers. Their business model is low margin- high volume one. This means that they will earn low income per customer but overall income will be high because of high volume of customers.

A large number of jobs are going to be created in the banking sector in the next five years. This will happen because more branches of both traditional banks and payments banks will be opened to increase financial inclusion.

Oil slips downhill – Some Gain, Some lose

oil explorationOil prices are currently hovering at less than $45 per barrel. A barrel is equal to 42 gallons or 159 liters. This decline in oil prices that started in 2014 has continued in 2015 too. This is in sharp contrast to 2013 when oil prices were more than $100 per barrel.

One reason that oil prices have come down so sharply in the past one year is the economic slowdown in China. China has been the engine of global economic growth in the past three decades. Average annual Gross Domestic Product (GDP) growth rate posted by China in this period averaged around 10% annually. In 2015 this average annual growth rate of the world’s second largest economy is likely to come down to around 7%.  Lower economic growth in China means lower demand for oil.

The second reason for decline in oil prices is the increase in supply of oil and shale gas. The global supply of oil has increased because of deep-sea oil drilling. This deep-sea oil drilling has been enabled due to technological innovations. A more important reason is shale gas. Shale gas is natural gas trapped in shale rocks. A technology called ‘hydraulic fracking’ has made it possible to release this natural gas trapped in shale rocks. Due to hydraulic fracking supply of natural gas in United States of America has increased so much that America doesn’t need to import oil for meeting its energy needs any more. Natural gas is a substitute of oil.

The decline in oil prices is a positive development for India. India is dependent on imports for more than 80% of its oil needs. It usually pays for this imported oil in US dollars. Most international trade takes place in dollars. Lower oil prices mean India will have to make lower dollar payments. This will also improve its trade deficit situation. Trade deficit is the difference between value of imports and value of exports of a country. When imports exceed exports, it is a situation of trade deficit. When exports exceed imports, it is a situation of trade surplus.

Many industries also stand to gain from lower prices of oil. The airline industry is one such industry. Oil or fuel costs constitute the biggest percentage of operating costs of an airline company. Oil marketing companies in India recently reduced the price of aviation turbine fuel (ATF) by 11% due to decline in global oil prices.

The automobile manufacturing industry also stand to gain as demand for automobiles will increase if oil prices stay depressed in the medium and long term. People will use and buy more automobiles if oil prices are lower.  Oil marketing companies and refining companies also stand to gain due to lower prices. On the other hand oil producing companies such as Oil & Natural Gas Corporation Ltd (ONGC), BP, Cairn etc stand to lose because of the lower oil prices.

Financial Statements: What do they tell?

financial statementsThe financial statements tell us about the financial position of the company or business. The stakeholders of a business mainly use the financial statements to get an idea about the financial performance of the company. The key stakeholders of a business are: shareholders & creditors, customers, employees, suppliers, state and the community.

The major financial statements prepared by a business are: profit & loss account, balance sheet, cash flow statement and statement of changes in equity. Financial statements are prepared according to Generally Accepted Accounting Principles (GAAP). One reason why financial statements are prepared according to a common set of accounting standards is to enable comparison of financial performance of two different businesses or companies. If financial statements are not prepared according to a common set of accounting standards then it will become difficult for end users to understand them. International Financial Reporting Standards (IFRS) are now being used by major international corporations to prepare their financial statements. It is mandatory for listed public limited companies to come out with their financial statements at the end of every financial quarter. A listed public limited company is one that has raised money from the public and is listed on a stock exchange.

The profit & loss statement (also known as income statement) gives the financial performance of a company in a given financial period. It gives the revenues, costs and profit (or loss) of a company in the period. The profit & loss statement begins with the amount of revenue or sales of the company during the period. Below the sales are costs of goods or services produced by the company.

The costs of goods and services are deducted from revenue to get the gross profit in the period. The operating expenses are deducted from the gross profit to get the operating profit of the company. Operating expenses include selling expenses, general & administrative expenses and depreciation. Other income is added to operating profit to get the profit before interest and taxes. The interest expense is deducted to get the profit before tax. Tax expenses are deducted to get profit after tax.

Modern Accounting Systems : A Need For Every Business

Analitika-smartfon-planshet-grafik-doslidzhennya-300x200Many small and medium sized businesses – especially those based in smaller towns andcities – still do not use modern accounting system software. They still stick to the old, manualpaper-based accounting system. These businesses are not realizing that accounting software notonly does the accounting work more efficiently but may actually improve business performance.

Contemporary accounting system software has many analytical capabilities. These analytical capabilities enable this software to make more accurate demand forecasts. Moreaccurate demand forecasts mean that a business can plan utilization of its resources moreefficiently. It can raise the resources required for meeting the forecasted demand beforehand andat lower costs. It can avoid situations of shortage and customer dissatisfaction.The company can analyze large amount of data of past years using a more sophisticatedaccounting system. This is not possible in case of manual accounting process.

The analysis oflarge amount of data of past years enables the business to get information and insight on itsperformance over the years. Which of its products have been making consistently highcontribution to its revenues and which of them have been making less contribution? In whatproportion its costs have grown in correspondence to growth in revenues? Which are the areaswhere costs can be controlled? These are some questions whose answers can be gotten by the useof accounting software.

Almost every large business today uses accounting system software. This system alsoreduces the probability of accounting errors. If the inputs in the system are accurate, the systemgives accurate results. Accurate accounting information coupled with continuous analysis offinancial data helps a business achieve continuous improvement in performance. This continuousperformance is then reflected in the form of higher sales and higher profitability.

Many small businesses hesitate in incurring the costs required for buying and implementing accounting system software. These businesses should treat the cost of installing accounting system software as an investment. This investment can be easily recovered by the increase in profitability that a business is able to achieve due to better performance because of better analysis of accounting data and information.

It is easy for employees, working in the accounts department, to learn to operate accounting system software. There are many training consultancies in India that provide accounting system software training to individuals and employees at very reasonable and affordable costs. Knowledge of operating accounting software is quite a valuable skill nowadays.