Capital Budgeting – The Rationale

The rationale that goes behind capital budgeting is the efficiency of the process. A firm needs to invest in the business continuity and invest into new machinery and plants for expanding the business. There could also be the need to expand the operation or replace the old machines that are worn out. The main aim of any business is to maximize the profit which is done by increasing the revenue or by reducing the cost.

The investment decisions that affect the revenue of the business

This includes those decisions that there in order to bring additional revenue by raising the firm’s size of total revenue. This can be done by either expanding the present operations or by developing a new product line. In both of these cases, there is a requirement of fixed assets.

The investment decision that reduces cost

This includes all the decisions of a firm that reduces the cost of doing business and leads to increasing the total earnings of the business. Thus when the machinery or any other asset becomes old the firm needs to analyze whether to continue using it or replace it. The firm will need to evaluate the benefits of doing this and what it has to forego to replace the machine with a new one. The new machine will be replaced when the firm sees benefits in doing so. This is done through two ways which are tactical investment decision and strategic investment decision.

In the tactical investment decision, it refers to those investment decisions that require lots of funds and it does not let the firm do anything very different from what it has already been doing.

In the strategic investment decision, it involves spending huge amounts of money and it includes doing differently from what the firm has been doing in the past. The acceptance of having a strategic investment will involve changes in the companies accepted risk and profits. This could lead the stockholders to revalue the company.

Things that you need to know

The economic life and the annual cash flow in capital budgeting is just an estimation and the actual data could either be more or less. The estimation of the cash flow could also be different from the actuals. Thus having total control over the capital expenditures not possible.

The capital budgeting application is based on the presumption of cash inflow and outflow. The future is not certain and the inflows and outflows may not be exactly correct. Thus the selection could end up being wrong.

 

Effect of stock market fluctuations on IPO strategies of small businesses

 

When you talk about investments you are warned about the market risks. These risks are nothing but the fluctuations that occur. The size of fluctuations and the impact on each of the stocks and other instruments would all depend on various factors. If your business is small and if there are no stocks sold to the public, your business would still be influenced by the market fluctuations. When the fluctuations are high it has a severe impact on the economy. And when economy takes a hit then the small businesses are the ones that are severely affected.

Have IPO plans? Then study the market carefully

For the small business owners who are planning about their IPO the situation is even more complicated. The interdependencies in the market is what causes this relationship between market volatility and the IPO strategies worked out by smaller organisations.

If there are momentary fluctuations or changes that quickly bounce back then as a small business owner there might be nothing big to worry about. And you can also be assured that the short term impacts are not too intense. These changes are not going to affect the operations and daily progress much. But it is the long term changes that your business should focus on. If there is a slide in the market that is likely to be long term then it does have a role to play in the economy status.

Business valuation results would be determined by fluctuations

How does the market volatility affect the IPO? The pricing of the company shares would generally be framed taking into account several factors. And one among them would be how good the company appears in the valuation. Market approach is one common approach in valuation of a business. The market changes also influence the position of your firm in the market and thus in turn also affects the pricing of the stocks.

Small and mid cap companies should watch out for market volatility

When the market is falling there is a different problem that actually causes the change and that is the perception of the investors. If there has been a market crash recently or if the market has been dull in the recent times, people would often prefer sticking with pre-existing stocks rather than risk buying an IPO. So that might not be a great time to offer the IPO. And care should also be taken in the pricing.

 

CSR for the company well being

 

For many decades the debate was going on about the responsibility towards a society that should be taken by the corporate companies but the topic got suppressed due to various reasons in recent years the CSR has attracted attention from all over the world and gained popularity in no time. CSR is abbreviated as corporate social responsibility. Now many corporate companies have changed their view towards CSR as they started believing that corporate generosity and social activities to be the heart and soul of business.

In the terms of business, the heart is referred to earning profits and soul is reoffered to value of serving society. Each and every growing company are keenly interested in CSR as this is working as a key marketing tool for developing and gain success in the competitive world. All companies have realized the fact that to survive in the fast-growing and competitive world they need to do good for their betterment and by doing so they even can improve their value in society.

The corporate social responsibility concept mainly focuses on improving social welfare by generating constant benefits for the stakeholders, stakeholders refer to customers, investors, employees, and society.

There is the difference between each and every corporate organization while implementing CSR as it depends on various factors of the respective company like the size of the organization, demands that are raised by stakeholders or culture of the particular company.

In simple terms CSR can be defined as the specific company is performing its business it should also consider the impact of the business operations on society, economy, and stakeholders. There is an act that is passed in 2013 in favor to CSR and this law is applicable to companies whose annual turnover is more than 1000 crore or more if the net worth of the company is more than or equal to 500 crores.

The law also insists the companies set up a committee that is related to CSR and it should have at least one board director. It also insists companies spend at least 2% of their net profits in CSR activities. Some of the activities specified under CSR by law are:

  • Promoting education
  • Gender equity
  • Women empowerment
  • Contributing some funds to prime minister relief fund
  • Enhancing employee vocational skills
  • Reduction of child death
  • Environment sustainability
  • Elimination of poverty and hunger
  • Should help in nation building by developing society socially and economically.

 

Fundamentals of Credit Management -Working Capital

The only sustainability and ability for a company to stay in business is the amount of Cash and its equivalents which is like the supply of oxygen for the business to flourish. A company with a long overdue collection period is probably yet to decide on the maximum stretch in collectibles for the month to meet their working capital requirements. Cash is the interconnecting nodes in all the financial assets of the business somehow or the other as:

  • Profits reported are result of rules, assumptions. estimates
  • Assets reported in the balance may not be reality check which connects the financials
  • The Profit & loss to the Balance sheet are connected in terms of the credit sales in the P & L to the accounts receivable in the BS.

The basic of Credit is extended to:

  • Increased liquidity to the suppliers
  • Increased profits
  • Higher productivity
  • Increase in the purchasing power of the business
  • promoting the growth of the company

Credit control being an important function is an important and independent function which is existence and makes the marketing and sales functions diligently in the business to provide a positive result. The amount of cash tied up in the business trading assets is reflected in the working capital of the company. The three main components of the working capital requirements of a company are:

  • Day sales outstanding which are said to be the DSO or the amount of cash you have unpaid in the business tied up to the unpaid invoices from the customers. Most of the businesses offer credit to the customers to manage their own cash flow cycle and that the uncollected cash is the cost to the business.
  • Day’s payable outstanding or the DPO tells you how you are doing with the suppliers. The aim here is higher the number if your suppliers are lending you the money to buy their services; that’s the cash you can use elsewhere in the business.
  • Finally, your days of inventory or the DI tells how much cash you have tied up in stock and raw materials. Like DSO a lower DI is a better projection of the cash flow cycle in the business.

Almost all businesses have working capital tied up in receivables and inventory, however having a negative working capital sometimes reflects the cash available which can be invested to earn interest income.The business model to be successful demonstrates the importance of cash flow management.

 

 

 

 

 

 

 

 

 

Techniques Of Capital Budgeting

Capital budgeting is done in various ways. Some of the techniques used are:

  • The internal rate of return
  • Net present value
  • Profitability index
  • Real options valuation
  • Payback period
  • Accounting rate of return
  • Equivalent annual cost
  • Average accounting return
  • The modified internal rate of return

There are different methods adopted for capital budgeting.

Some Techniques and methods of capital budgeting explained

  • The payback period method

In this method, the word period refers to the time in which the proposal will start to generate cash to recover the initial investments that have been made. The method lays a lot of emphasis on the economic life of the project and the cash inflow. The investments that are made into the project is also emphasized on and there is no use of the time value of money in this method. The method helps to select a proposal based on what the earning capacity of the project is. There is some simple calculation involved which helps to select or reject a project and the result helps to determine what the risk involved is.

  • Accounting rate of return method – ARR

This method takes care of the shortcomings of the payback period method. The rate or return is expressed as what percentage it is of the earnings of the investment on a particular project. As per this method, any project that has an ARR that is higher than the minimum rate that is established will be considered and those that are below the minimum rate established gets rejected.

The method takes into consideration the complete economic life of the project and thus allows better comparison.The method, however, does not consider the time value of money as well as the length of the projects life.

  • The discounted cash flow method

The technique calculates the cash inflow as well as cash outflows throughout the assets life. This then gets discounted a discount factor is used to do the same. The discounted cash inflow, as well as the outflow, is compared and this method considers the interest as well as the return factor after the payback period.

  • The net present value of NPV method

The method is popular and it helps to evaluate the proposal of capital investment. The cash inflow that is expected in different time periods in the future is discounted at a rate. The present value of the cash inflow is compared to the original investment made. The difference needs to be positive for it to be accepted. The time value of money is considered and this is done in order to maximize the profit of the owner.

How To Trade The Stock Market Successfully

Many of us are ardent traders and we love to be in the market looking out for opportunities. But this does not authorize us to be the advisors elaborating the goodness of this field. There would still be people who would be doubting this field for its unpredictable fluctuations and this would keep them away from becoming a part of this. So what best could explain them the reasons for these fluctuations and make them understand that this is also a viable field for making investments? It is nothing but the various factors that affect and cause fluctuations in the stock market and these are believed to be the best justifications that would elucidate and explain the unexpected and sudden fluctuations.

A successful trading depends on how well a trader understands the market and also the factors that affect it. Now you can also become one if you get to the ones listed below for they are considered the major players in bringing in a change in the prices of the shares.

  • Economic condition– a change in the economic factors would bring in a huge change in the stock market. For example, an insurance company, that has been doing well so far has now been affected by the changes in the insurance policies and rates would actually become a very big and a perilous one for the entire industry as a whole.
  • Market information – it is said that for a trader to be successful in his stock and trade experiences, it is essential and expected of him that he gets all the latest information from the market. But here too there are certain traders who would look into those that are familiar to them irrespective of whether the others are beneficial or not. So based on this perception of the market the values of the assets or the stocks would get affected.
  • World events – this is another important factor that determines the drop or rise in stock prices. When a company announces the closing down of certain departments aiming at reducing the size or if it decides to lay off workers for the same reason, the value of their stocks would fall badly. In the same way, if there is anything bad or unexpected about a company`s performance, the stock or share prices of its competitors go high automatically.

So it is important that the traders take into account the very many various factors that would become the influencing factors in determining the stock prices.

Effects of inflation in business enterprises

When there is a continuous increase in the price level of goods and services, it is called inflation. It is measured as a change in the annual percentage. Under the period of inflation, the price of all the things keeps rising with time. It means every dollar you have could buy a lesser quantity of goods. Listed below are few ways it affects our business.

How the inflation affects

Reduces purchasing power– Inflation will result in reducing the purchasing power of business or people. What you could have procured earlier with a particular amount of money can be used now to buy a lesser quantity of the same. The price change would be the result of an increase in demand for the product because of the ever-increasing population and at the same time, there is a decrease in the supply of the product. The decrease in supply would be the result of a natural calamity, political unrest and so on.

Encourages investing and spending– The most predictable behavior of all the business enterprise, while there is an inflation, is to buy the goods now rather than planning to buy it later. Cash will be only losing the value in future. Hence it is best to stock up those goods which are predicted to increase the value in future. All the raw materials required for the business for which the price will increase has to be bought in advance.

Results in more inflation– The urge to buy things in advance and invest will result in boosting the inflation. As the business people try to spend as much as possible to lower the time they hold the depreciating currency, it will result in overflow of cash which no one wants. The supply of money exceeds the demand, again the currencies purchasing power falls at a very fast rate.

Cost of borrowing increases– In order to keep a control on the check, the interest rate will be increased. If the interest rates are low, it encourages businesses to take up more loan and in turn increases the spending. If the interest rates are high, it will keep a check on the loan application. The business organization will feel it is best to put money in the bank so that it will be able to earn interest. Hence the increasing of borrowing rate can to an extent keep a check on inflation as the overflow of money in the market will reduce.