Financial Concepts for Loans and Real Estates

We can say that production is an activity which transforms the input into output. For example, there is need of labour and machinery to manufacture car. It is the technical aspect between input and output. The function of production express the relationship between quantity of output produced and quantity of input required. Production function can be expressed as:

Q = f (L,K)
L = Labour
K = Capital
Q = Output

Production function has four ways:

Law of variable proportion:

We can understand it as:

Total Product (TP), which is produced by a firm; Average Product (AP), it is the divided quantity of variable factors which is used to produce.

AP = TP/Q

AP = Average Product
TP = Total Product
Q = Number of Variable Factors

Marginal Product (MP) – Law of variable proportion is also known as law of diminishing returns. When variable factors are increased in equal doses, keeping the fixed factor constant, the total product will increase.

Law of Variable Proportion is an old economic principle, which was the firs redefined version of Marshall. Most of the examples of production function involve manufacturing sectors and agriculture.

Law of Return to scale:

It is known as long run production function also. The Law of Returns to Scale will show the change in the output when all the factors of production are increased together. It describes the relationship between output and scale of input.

Law of Economies of Scale:

It exists when larger output is associated with low per unit cost. It has been divided into two economies – Internal Economies and External Economies.

At last, economies of scale exist when large output is associated with low per unit cost. Economies of scale have two parts, internal and external economies of scale. Dis-economies of scale arise to a firm beyond optimum level, as the firm may face problem like lack of co-ordination, management, marketing etc. Economies of scope are decline in the average cost due to change in the product mix of output. A production process becomes chapter when there are more than one products produced instead of one as there is more efficiency in distribution of making.

If you are struggling with your debts, then you may benefit from financial support.

Many organisations offer free financial support to people finding their finances difficult to manage. One example of this support is help with budgeting.

Budgeting is all about understanding and managing your finances – in other words, keeping control of your monthly income (the money you earn/receive) and expenditure (the money you spend/pay out).

Your total income should include everything you earn/receive: your salary, benefits, grants, etc. Your total expenditure should include your ‘priority’ debt repayments – for example, your mortgage/rent payments – and your day-to-day living expenses. You should not include payments to your ‘non-priority’ debts (credit cards, store cards, etc.) at this point.

Once you have noted down your total income and total expenditure, you should be able to work out your disposable income. This is done by simply subtracting your total expenditure from your total income. Your disposable income is the amount of money available for non-priority debt payments and, if there is any left over, for saving and non-essential spending.

Now that you have your disposable income, you should make a list of all your non-priority debt repayments (unsecured loans, credit cards, etc.) and ask yourself: Is it enough to cover all the repayments?

If it isn’t, then you really should consider seeking further financial support to help you address the problem. You may be advised to look into a professional debt solution.

Even if you do find that your disposable income is enough to cover the cost of servicing your debts, you may save yourself a lot of money in interest if you ‘overpay’ your monthly payments – in other words, make more than the required minimum monthly payment.

If you can do this, you’ll clear your debts faster – and that means you’ll pay less interest in the long run.

Financial planning is a process by which funds required for each course of action is decided. It must consider expected business scenario and develop appropriate course of action. A financial plan has to consider capital structure, capital expenditure and cash flow.

Steps in financial planning:

1) Establish corporate objectives: Corporate objectives could be grouped into qualitative and quantitative. For example, a company’s mission statement may specify “create economic value added”. But this qualitative statement has to be stated in quantitative terms such as a 25% ROE or a 12% earnings growth rates. Since business enterprises operate in a dynamic environment, there is a need to formulate both short run and long run objectives.

2) Next stage is formulation of strategies for attaining the objectives set. In this condition connection corporate develops operating plans. Operating plans are framed with a time horizon. It could be a five year plan or a ten year plan.

3) Once the plans are formulated, responsibility for achieving sales target, operating targets, and cost management bench marks, profit targets, etc. is fixed a respective executives.

4) Forecast the various financial variables such as sales, assets required, flow of funds, cost to be incurred and then translate the same into financial statements. Such forecasts help the finance manager to monitor the deviations of actual from the forecasts and take effective remedial measure to ensure that targets set are achieved without any time overrun and cost overrun.

5) Develop a detailed plan for funds required for the plan period under various heads of expenditure.

6) From the funds required plan, develop a forecast of funds that can be obtained from internal as well as external sources during the time horizon for which plans are developed. In this connection legal constrains in obtaining funds on the basis of covenants of borrowing should be given due weight age. There is also a need to collaborate the firm’s business risk with risk implications of a particular source of funds.

7) Develop a control mechanism for allocation of funds and their effective use.

At the time of formulating the plans certain assumptions need to be made about the economic environment. But when plans are implemented economic environment may change. To manage such situations, there is a need to incorporate an inbuilt mechanism which would scales up or scale down operations accordingly.