6)Methods of payment in foreign activity
Foreign currency.A buyer and a seller in different countries rarely use the same currency. Payment is usually made in either the buyer's or the seller's currency or in a mutually agreed-on currency that is foreign to both parties.
One of the uncertainties of foreign trade is the uncertainty of the future exchange rates between currencies. The relative value between the local currency and the buyer's currency may change between the time the deal is made and the time payment is received. If the exporter is not properly protected, a devaluation in the foreign currency could cause the exporter to lose money in the transaction.
One of the simplest ways for an exporter to avoid this type of risk is to quote prices and require payment in local currency. Then the burden and risk are placed on the buyer to make the currency exchange. Exporters should also be aware of problems of currency convertibility; not all currencies are freely or quickly convertible into local currency.
7.The business model
In order to illustrate the money movements in a business, we will use a business model.
The model illustrates that every business starts with capital (Circle 1) and that this is introduced into the business as cash (Circle 2). This in turn is invested either into items which are:
1. not intended for resale (Circle 3), the fixed assets, also called the capital expenditure or
2. into items intended for resale. These are set out as Circles 4, 5, 6, 7, 8 less 9, and its is these items which go into the investment area termed the working capital.
Capital - Circle 1- stands for the sources of money invested in business. These are either the owner's own funds - for example in the case of a corporation share capital - or funds obtained from lenders - loan capital. The significance of these two sources are:
In the case of the owner's capital the amount invested is not repayable and the rewards - dividends - are only payable when the business's prosperity allows this to happen.
In the case of loan capital the amount invested is repayable at a fixed future point in time, and the reward - the interest as it is known - is payable however the business has prospered.
From this it can be seen that the more obtained from borrowed sources, the greater the pressure is on the business to pay the necessary interest and eventually to repay the loan itself when it becomes due.
The proportion of capital obtained from these two sources is termed the leverage of a business. More than 50 per cent of capital obtained from owners is termed low gearing, and more than 50 per cent of the capital obtained from lenders is termed high leverage.
Cash (circle 2) is the resource reservoir that is going to be affected by each corporate action.
Such reservoir is going to be increased by inflows resulting from share or loan capital operations, by cash sales, and by collections from the firm's debitors.
On the other hand, it is going to be depleted by outflows resulting from investments, from the production process that ultimately will end with finished goods and services, and from the delayed payments to suppliers.
Fixed assets (Circle 3) are items such as land and buildings, motor vehicles, office equipment not bought for resale. Although they are purchased with no intention of resale, they will in many cases, because of their nature, wear out and become obsolete. Consequently two points should be borne in mind if a successful business is to stay successful. It must:
a) have the fixed assets needed for the particular business' purpose. After all, once a business has purchased a fixed asset, it is stuck with it!
b) be able to replace such investments when they wear out and/or become obsolete.
Working Capital (Circles 4, 5, 6, 7, 8 less 9). These Circles stand for materials, labour and overheads which go into the finished goods or finished services (Circle 7), which the business sells either for cash or to debtors (accounts receivable) Circle 8, the customers who hesitate before they pay.
However, just as a business has customers who do not pay immediately for the services and goods sold to them, so in the same way a business delays payment of what it owes - its bills. This is shown by Circle 9 which is connected in the business model to Circle 4, 5 and 6 and represents the fact that material suppliers are often not paid immediately when the goods are received or again wages are paid at the month or week end and many other expenses like electricity, telephone and advertising are not paid until after their benefits have been received by the business.
Where such delays take place the people or businesses who are awaiting payment are referred to - as shown in Circle 9 as the creditors (accounts payable).
In a way the creditors are helping to finance the materials, labour and overhead cost of the business, and for this reason to calculate the working capital investment it is necessary to deduct Circle 9 from the total of Circles 4, 5, 6, 7 and 8.
The business models shown set out the facts of business finance namely:
a) That a business obtains money from owners and lenders
b) That it invests such money in:
¨ Fixed assets, also referred to as capital expenditure, things it does not purchase for resale, and
¨ Working capital - things it does purchase for sale, either as they are - e.g. bread purchased by a retail grocer for sale as bread to its customers, or in their converted form - e.g. planks of timber purchased by a furniture manufacturer for conversion into sideboards, or labour employed to provide a service such as in a TV repair shop.
c) Finally, business may invest in outside investment.
8.Monetary receipts of the organization
1) The gain from product realization.
Gain – the basic source of formation own financial enterprise resources. It is formed as a result of primary activity. The gain from primary activity acts in the form of a gain from production realizations (the executed works, the rendered services).
2) The gain from investment activity is expressed in a kind of financial result from sale of extra turnaround actives, realization securities.
3) The gain from financial activity includes result from
placing among investors of bonds and enterprise actions.
9)Definition of the profit
In accounting, profit can be considered to be the difference between the purchase price and the costs of bringing to market whatever it is that is accounted as an enterprise (whether by harvest, extraction, manufacture, or purchase) in terms of the component costs of delivered goods and/or services and any operating or other expenses. There are several important profit measures in common use. Note that the words earnings, profit and income are used as substitutes in some of these terms (also depending on US or UK usage), thus inflating the number of profit measures.
Gross profit equals sales revenue minus cost of goods sold (COGS), thus removing only the part of expenses that can be traced directly to the production or purchase of the goods. Gross profit still includes general (overhead) expenses like R&D, S&M, G&A, also interest expense, taxes and extraordinary items.
Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA) equals sales revenue minus cost of goods sold and all expenses except for interest, amortization, depreciation and taxes. It measures the cash earnings that can be used to pay interest and repay the principal. Since interest is paid before income tax is calculated, the debtholder can ignore taxes. Earnings Before Interest and Taxes (EBIT) or Operating profit equals sales revenue minus cost of goods sold and all expenses except for interest and taxes. This is the surplus generated by operations. It is also known as Operating Profit Before Interest and Taxes (OPBIT) or simply Profit Before Interest and Taxes (PBIT).
Earnings Before Tax (EBT) or Net Profit Before Tax equals sales revenue minus cost of goods sold and all expenses except for taxes. It is also known as pre-tax book income (PTBI), net operating income before taxes or simply pre-tax Income.
Earnings After Tax or Net Profit After Tax equals sales revenue after deducting all expenses, including taxes (unless some distinction about the treatment of extraordinary expenses is made). In the US, the term Net Income is commonly used. Income before extraordinary expenses represents the same but before adjusting for extraordinary items.
Earnings After Tax (or Net Profit After Tax) minus payable dividends becomes Retained Earnings. To accountants, Economic Profit, or EP, is a single-period metric to determine the value created by a company in one period—usually a year. It is Earnings After Tax less the Equity Charge, a risk-weighted cost of capital. This is almost identical to the economists' definition of economic profit.
There are analysts who see benefit in making adjustments to economic profit such as eliminating the effect of amortized goodwill or capitalizing expenditure on brand advertising to show its value over multiple accounting periods. The underlying concept was first introduced by Schmalenbach, but the commercial application of the concept of adjusted economic profit was by Stern Stewart & Co. which has trade-marked their adjusted economic profit as Economic Value Added (EVA). Economists define also the following types of profit:
Abnormal profit (or Supernormal profit)
Subnormal profit
Monopoly profit (or Super profit) Optimum Profit is a theoretical measure and denotes the "right" level of profit a business can achieve. In business, this figure takes account of marketing strategy, market position, and other methods of increasing returns above the competitive rate.
Note: Accounting profits should include economic profits, which are also called economic rents. For instance, a monopoly can have very high economic profits, and those profits might include a rent on some natural resource that firm owns, whereby that resource cannot be easily duplicated by other firms.
10)Income statement and profit calculation
Income statement (also referred to as profit and loss statement (P&L), statement of financial performance, earnings statement,operating statement or statement of operations) is a company's financial statement that indicates how the revenue (money received from the sale of products and services before expenses are taken out, also known as the "top line") is transformed into the net income (the result after all revenues and expenses have been accounted for, also known as the "bottom line"). It displays the revenues recognized for a specific period, and the cost and expenses charged against these revenues, including write-offs (e.g., depreciation and amortization of variousassets) and taxes.[1] The purpose of the income statement is to show managers and investors whether the company made or lost money during the period being reported.
The important thing to remember about an income statement is that it represents a period of time. This contrasts with the balance sheet, which represents a single moment in time.
Charitable organizations that are required to publish financial statements do not produce an income statement. Instead, they produce a similar statement that reflects funding sources compared against program expenses, administrative costs, and other operating commitments. This statement is commonly referred to as the statement of activities. Revenues and expenses are further categorized in the statement of activities by the donor restrictions on the funds received and expended.
The income statement can be prepared in one of two methods. The Single Step income statement takes a simpler approach, totaling revenues and subtracting expenses to find the bottom line. The more complex Multi-Step income statement (as the name implies) takes several steps to find the bottom line, starting with the gross profit. It then calculates operating expenses and, when deducted from the gross profit, yields income from operations. Adding to income from operations is the difference of other revenues and other expenses. When combined with income from operations, this yields income before taxes. The final step is to deduct taxes, which finally produces the net income for the period measured.
Profit = income-consumption.
11. Factors influenced on profit and ways of it increasing
External factors, which influenced on profit:
an environment factors;
transportation terms;
social and economic conditions;
a level of development of foreign economic relations;
the prices for industrial resources, etc.
Internal factors, which influence on profit:
Main factors:
a sales volume,
production expenses,
structure of production and expenses,
production price
Other factors connected with infringement of economic discipline
a wrong establishment of the prices,
infringements of working conditions and quality of production, leads to penalties and economic sanctions, etc
Ways of profit increasing:
At a choice of ways of increase in profit are guided basically by the internal factors influencing size of profit. The increase in profit of the enterprise can be reached
at the expense of output increase;
improvements of quality of production;
sales of the excessive equipment and other property or its delivery in rent;
decrease in the cost price of production at the expense of more rational use of material resources, capacities and the areas, a labor and working hours;
manufacture diversifications;
expansions of the market of sales etc.
Profitability ratios
A class of financial metrics that are used to assess a business's ability to generate earnings as compared to its expenses and other relevant costs incurred during a specific period of time.
For most of these ratios, having a higher value relative to a competitor's ratio or the same ratio from a previous period is indicative that the company is doing well.
13) Current Assets – type and definition
Current assets are things a business owns that are likely to be used up or converted into cash within one business cycle--usually defined as one year. The most common line items in this category are cash and cash equivalents, short-term investments, accounts receivable, inventories, and other various current assets.
Cash and Cash Equivalents. This line item doesn't necessarily refer to actual bills sitting in a cash register or vault. Generally, cash is held in low-risk, highly liquid investments such as money market funds. These holdings can be liquidated quickly with little or no price risk. This is considered money that can be used for any purpose the company wants.
Short-Term Investments. This represents money invested in bonds or other securities that have less than one year to maturity and earn a higher rate of return than cash. These investments may take a little more effort to sell, but in most cases, investors can lump them with cash to figure out how much money a firm has on hand to meet its immediate needs.
Accounts Receivable. Money owed by customers (individuals or corporations) to another entity in exchange for goods or services that have been delivered or used, but not yet paid for. Receivables usually come in the form of operating lines of credit. On a company's balance sheet, accounts receivable is often recorded as an asset because this represents a legal obligation for the customer to remit cash for its short-term debts
Inventories. There are many different types of inventories, including raw materials, partially finished products, and finished products that are waiting to be sold. This line item is especially important to watch in manufacturing and retail firms, which are saddled with large amounts of physical inventory.
Additionally, inventories tie up capital. The cash that was used to create inventory can't be used for anything else until it's sold. Other Current Assets. While there are too many to list here, this category includes any other assets the firm may have that are expected to turn into cash within the next year. However, some current assets will not turn into cash, the most common of which are known as prepaid expenses.
14) Ways of Current Asset financing
Current assets can be temporary (seasonal) or permanent. Permanent current assets can be defined as the base level of cash, accounts receivable (A/R), and inventory and are determined by their low point through several sales cycles. Temporary current assets are sudden increases in A/R and inventory due to spikes in sales. The current asset financing strategy focuses on determining the best method of financing both temporary and permanent current assets. Given the temporary and permanent nature of current assets, they can be financed with either short- or long-term sources of funding, however, there is a risk/return trade-off. Short-term financing (or lines of credit) typically costs less than long-term financing, however, greater use of short-term financing results in a greater risk. Lines of credit are more susceptible to interest rate risk (changing rates) and to the risk that it may not be renewed. There are three current asset financing strategies- maturity matching, conservative, and aggressive:
1. Maturity Matching Financing Strategy
This strategy finances permanent current assets and fixed assets with long-term sources and temporary current assets with short-term sources.
2. Conservative Financing Strategy
In this strategy, only a portion of temporary current assets are financed with short-term sources. Long-term financing is used to fund the other portion of temporary current assets along with the permanent current assets and fixed assets.
3. Aggressive Financing Strategy
Using an aggressive financing strategy, a company will finance a portion of permanent current assets and all temporary current assets with short-term sources. Long-term financing is used to fund the other portion of permanent current assets and fixed assets.
15) Current Asset efficiency evaluation
Current assets - A balance sheet item which equals the sum of cash and cash equivalents, accounts receivable, inventory, marketable securities, prepaid expenses, and other assets that could be converted to cash in less than one year. A company's creditors will often be interested in how much that company has in current assets, since these assets can be easily liquidated in case the company goes bankrupt. In addition, current assets are important to most companies as a source of funds for day-to-day operations.
Current Assets include Cash, Receivables, Inventory and Prepaid Expenses.
Cash and Cash Equivalents: This line item doesn't necessarily refer to actual bills sitting in a cash register or vault. Generally, cash is held in low-risk, highly liquid investments such as money market funds. These holdings can be liquidated quickly with little or no price risk. This is considered money that can be used for any purpose the company wants.
Accounts Receivable: these are sales which the customer has not yet paid but is expected to pay within the next year. Generally, accounts receivable are shown as a net amount of what a company expects to ultimately collect, because some customers are likely not to pay. If accounts receivable are growing much faster than sales, it generally means a company isn't doing an ideal job collecting the money it is owed. This could potentially be a sign of trouble because the company may be offering looser credit terms to increase its sales, but it may have difficulty ultimately collecting the cash it's owed. Conversely, if accounts receivable are growing much slower than sales, the firm's credit terms may be too stringent, at the expense of sales.
Inventories: There are many different types of inventories, including raw materials, partially finished products, and finished products that are waiting to be sold. Similar to accounts receivable, changes in inventories are generally related to a company's sales, or more specifically, the gross profit--sales price minus the cost of the inventory sold--it makes from each sale. If inventory levels are growing much faster than a company's sales, it may be making or buying more goods than it can sell. That may force the company to lower its prices, which results in lower profits for each item sold and lower profitability for the company. In some cases, it may have to reduce prices to levels below the value of the inventory itself, resulting in losses.
16) Financial planning at the enterprise
Financial planning is a series of steps which are carried out, or goals that are accomplished, which relate to an individual's or a business's financial affairs. This often includes a budget which organizes an individual's finances and sometimes includes a series of steps or specific goals for spending and saving future income. This plan allocates future income to various types of expenses, such as rent or utilities, and also reserves some income for short-term and long-term savings. A financial plan sometimes refers to an investment plan, which allocates savings to various assets or projects expected to produce future income, such as a new business or product line, shares in an existing business, or real estate.
In business, a financial plan can refer to the three primary financial statements (balance sheet, income statement, and cash flow statement) created within a business plan. Financial forecast or financial plan can also refer to an annual projection of income and expenses for a company, division or department. A financial plan can also be an estimation of cash needs and a decision on how to raise the cash, such as through borrowing or issuing additional shares in a company.
The financial plan consists of a 12-month profit and loss projection, a four-year profit and loss projection (optional), a cash flow projection, a projected balance sheet, and a breakeven calculation. Together they constitute a reasonable estimate of your company's financial future.
17. Budgeting
A budget is a financial plan and a list of all planned expenses and revenues. It is a plan for saving, borrowing and spending. A budget is an important concept in microeconomics, which uses a budget line to illustrate the trade-offs between two or more goods. In other terms, a budget is an organizational plan stated in monetary terms.In summary, the purpose of budgeting is to:
Provide a forecaste of revenues and expenditures, that is, construct a model of how our business might perform financially if certain strategies, events and plans are carried out.
Enable the actual financial operation of the business to be measured against the forecast.
Budgeting in a business sense is the planned allocation of available funds to each department within a company. Budgeting allows executives to control overspending in less productive areas and put more company assets into areas which generate significant income or good public relations. Budgeting is usually handled during meetings with accountants, financial experts and representatives from each department affected by the budgeting.
Budget helps to aid the planning of actual operations by forcing managers to consider how the conditions might change and what steps should be taken now and by encouraging managers to consider problems before they arise. It also helps co-ordinate the activities of the organization by compelling managers to examine relationships between their own operation and those of other departments. Other essentials of budget include -To control activities. -To communicate plans to various responsibility center managers. -To motivate managers to strive to achieve budget goals. -To evaluate the performance of managers.The process of calculating the costs of starting a small business begins with a list of all necessary purchases including tangible assets (for example, equipment, inventory) and services (for example, remodeling, insurance), working capital, sources and collateral. The budget should contain a narrative explaining how you decided on the amount of this reserve and a description of the expected financial results of business activities. The assets should be valued with each and every cost. All other expenses are like labour factory overhead all freshmen expenses are also included into business budgeting.
The budget of a company is often compiled annually, but may not be. A finished budget, usually requiring considerable effort, is a plan for the short-term future, typically one year. While traditionally the Finance department compiles the company's budget, modern software allows hundreds or even thousands of people in various departments (operations, human resources, IT, etc.) to list their expected revenues and expenses in the final budget.
If the actual figures delivered through the budget period come close to the budget, this suggests that the managers understand their business and have been successfully driving it in the intended direction. On the other hand, if the figures diverge wildly from the budget, this sends an 'out of control' signal, and the share price could suffer as a result.
Budget types
Sales budget – an estimate of future sales, often broken down into both units and dollars. It is used to create company sales goals.
Production budget – an estimate of the number of units that must be manufactured to meet the sales goals. The production budget also estimates the various costs involved with manufacturing those units, including labor and material. Created by product oriented companies.
Cash flow/cash budget – a prediction of future cash receipts and expenditures for a particular time period. It usually covers a period in the short term future. The cash flow budget helps the business determine when income will be sufficient to cover expenses and when the company will need to seek outside financing.
Marketing budget – an estimate of the funds needed for promotion, advertising, and public relations in order to market the product or service.
Project budget – a prediction of the costs associated with a particular company project. These costs include labor, materials, and other related expenses. The project budget is often broken down into specific tasks, with task budgets assigned to each.
Revenue budget – consists of revenue receipts of government and the expenditure met from these revenues. Tax revenues are made up of taxes and other duties that the government levies.
Expenditure budget – includes spending data items.
The key to successful budgeting is both flexibility and inflexibility. Certain expenses are fixed, so payment of those bills should be an inflexible element. Nothing is more important than paying those particular bills in full. In business, departments need to know the absolute ceiling on spending. Budgeting works best when very few exceptions are made to the upper limits. The idea of fiscal responsibility is to form a workable budget and stick to it as best as possible.
18. Short term loans
Short-term loans, like their name suggests will generally reach maturity in one year or less. They are designed specifically to help your business get through speed bumps. A common type of business that will secure a short term type of loan is a seasonal business. The loan will carry them through the off-peak months. Short term loans usually take the form of lines of credit, working capital loans or accounts receivable financing.
Short term loans are meant for those who require urgent cash for the short duration. Short term loans help the people to ease their temporary cash requirements due to rising expenses and not enough resource to meet needs. You can avail amount according to your need and repayment capabilities. Short Term Loans is available round the clock to find you loans at the time of your need.
There are many different kinds of short term loans on the market. These are all loans that cater to different types of people who need money for short periods of time. Here are a few of the many kinds of short term loans that people can borrow for all types of reasons.
1. Emergency Cash Loan An emergency cash loan is offered to those needing instant cash. Borrowers can use an emergency cash loan to cover such immediate expenses as medical bills, home or car repairs, or other unforeseen costs. If your bank is unwilling to help you, consider contacting a credit union. Credit unions generally have less strict lending policies than traditional banks. 2.Payday Loan If you're considering an emergency cash loan, but you have poor credit, a payday loan may be your best (and only) option. These loans have much higher interest rates and fees than other short term personal loans, and therefore should only be considered in extreme situations. Many times, payday loans can make financial problems worse. To be eligible for a payday loan, you simply have to show proof of employment (e.g. a paycheck). For example, if your payday loan is for $800, you may have to pay $200 in fees alone. With some payday loans, borrowers pay over 400% Annual Percentage Rate (APR). While this type of loan is better than a bounced check, use caution when applying for one. 3.Line of Credit A line of credit is another type of short term personal loan that is a great way to tackle cash flow issues. One benefit of a line of credit over most other short term personal loans is that banks do not charge interest for the part that you don't use.For example, if you have a credit line of $30,000, but you're only using $15,000, you'll only pay interest on what you use ($15,000). Borrowers can continue to take out as much as they need, as long as they don't exceed the maximum amount of the credit line. 4.Bridge Loan A bridge loan can help you when you need extra finances. For example, if you buy a new house but your old house is still on the market and has yet to sell, you may need a bridge loan to help cover both mortgages. Generally, borrowers must put up some type of collateral (e.g. their for-sale home) to back a bridge loan. Though bridge loans have greater fees and interest rates than home equity loans and other short term personal loans, they are a good option for many homebuyers who can't hold off on buying a new home or selling an existing one.
Short term loans are loans preferred by most people because they would not be bound by a loan for a long period of time. There are many avenues to search for providers of loans that have short repayment period. Institutions or organizations offering such type of loans are banks, financial organizations and online lending companies. Although these loans are considered short terms, there is no exact rule on the duration of the repayment period. This totally depends on the loan provider. Most of the time, the borrower is allowed to repay the amount of the loan together with the interest within a year or so. The repayment periods of these loans are designed to fit the financial capability and repayment ability of the borrower.
19) Long term loans
Meaning and porpoise:
TO FINANCE FIXED ASSETS;TO FINANCE PERMANENT PART OF WORKING CAPITAL;TO FINANCE GROWTH AND EXPANSION OF BUSINESS.
Factors determining long term sources of finance:
NATURE OF BUSINESS;NATURE OF GOODS PRODUCED;TECHNOLOGY USED.
Meaning of share and share capital :
A share is one unit into which the total share capital is divided.
Share capital of the company can be explained as a fund or sum with which a company is formed to carry on the business and which is raised by the issue of shares.
Investment in the shares of any company is a basis of ownership in the company and the person who invest in the shares of any company, is known as the shareholder, member and the owner of that company.
Types of shares: The share capital of a company consists of two classes of shares, namely:
Preference Shares;Ordinary (Common, Equity) Shares
Preference share A preference share is one, which carries the following two preferential rights:The payment of dividend at fixed rate before paying dividend to equity shareholders;The return of capital at the time of winding up of the company, before the payment to the equity shareholder.
Types: In addition to the aforesaid two rights, a preference shares may carry some other rights. On the basis of additional rights, preference shares can be classified as follows:
Cumulative /Non cumulative;Participating/Non participating;Convertible/Non convertible;Redeemable/Non redeemable.
Equity shares: Equity share can be defined as the share, which is not preference shares. These shares are also known as ‘Risk Capital’ Features
Residual claim to income;Residual claim on assets;Right to control;Pre-emptive right;Limited liability
Advantages of preference share: From companies point of view:Dividends do not have to be paid in a year in which profits are poor;they do not carry voting rights;does not restrict the company's borrowing power
Advantages of equity share:To management:Long-term and Permanent Capital;No Fixed Burden.To shareholders:More income;Right to Participate in the Control and Management;Capital profits.
Disadvantages of equity share:To the shareholders:Uncertainly about payment of dividend;Danger of over–capitalisation;Ownership in name only;Higher Risk
To the management:Conflict of interests.