Financial Concepts for Loans and Real Estates

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.

After a huge discussion on financial chapter we have come to “Standard Costing” chapter to discuss about it. About it management says that it is the standard costing is an important tool to planning and cost control.

Objectives of Standard Costing:

Meaning of Standard Costing

Nature of Variance Analysis

Calculate Variances

According to the ICMA, London Standard Cost is, “the pre-determined cost based on technical estimate for materials, labour and overhead for a selected period of time and for a prescribed set of working conditions.”

You should know that Standard Cost is different from “Estimated Cost” and it express what should be the cost, in advance of actual production.

Along with we should know about Standard Costing also. The definitions of Standard Costing also look from ICMA, London, “the preparation of standard costs and applying them to measure the variations from standard costs and analyzing the causes of variations with a view to maintain maximum efficiency in production.”

Standard Costs involves in:

a. Ascertainment of standard costs for each element costs – material, labour, overhead
b. Use of standard costs as a guide and measure of actual costs
c. Measurement of actual costs
d. Comparison of actual costs with the standard costs
e. Measurement and analysis of deviations of actual costs from standard costs

After having understood about the standard costs we should proceed with Variance Analysis. According to the MBA book of SMU variance is, “the difference between a standard cost and the actual cost incurred during a period.

In the variance analysis mainly two elements involved which are:

Measurement of individual variances and
Identification of causes of each variance

We can illustrate here some formula about variance:

Material usage variance = (Standard Quantity – Actual Quantity) x Standard Price

[MUV = (SQ –AQ) x SP]

Computing mix variance:

Material mix variance = [standard cost of standard mix] – [standard cost of actual mix]

Or

[Standard mix – actual mix] x standard rate per unit

Or

[Revised standard mix of actual input – actual mix] x Standard price.

I think now all the things are clear about the standard costs and variance from the financial book. I have already explained the entire chapter before much clearly with some example. I think to publish here about some new chapter of finance and loans also.

Before proceeding to the budgetary control we should explain 1st budget. According to ICMA London Budget has been defining as, “A financial and/ or quantitative statement prepared and approved prior to a defined time of the policy to be pursed during that period for the purpose of attaining a given objective.”

Budgets mainly work for:

Preparing statement in terms of money or equivalent of money

It is for prior to a future period of time

The objectives to be attained and the policies to be adopted are laid down in advance.

Like it about the budgetary control ICMA London writes, “The establishment of budgets relating to responsibilities of executives to the requirement of a policy and continuous comparison of actual with budgeted results either to secure by individual action the objectives of that policy or to provide a basis for its revision.”

Now, we will define alls along with one – budget, budgeting and budgetary control:

About it we will look some references from MBA books of SMU, “Budget is the target or the objective of each section of an organization. Budgeting is the process of preparing the budgets. Budgetary control is the technique and process of fixing the targets, preparing the budgets and using them as an effective tool of planning and control.”

Most simply now we can define the objectives of budgetary control as:

Planning the policies

Coordinating activities

Controlling costs

Increases efficiency

Like this there involves some steps also in budgetary control are:

Preparation of organization chart

Establishment of budget centers

Appointment of budget committee

Preparation of Budget Manual

Determination of Budget Period

Determination of Key Factor or Budget Factor

After the huge discussion about budgetary control we can know about its some limitation also which are:

Its limitations show that it is changeable.

Budgets may kill managerial initiative.

About it people says that it is costly and time consuming. However, it is decisive chapter about accounting. For more details read continuously the financial blog, I will write the chapter with more examples.

Is financial statement analysis is only the analysis of facts, figures and statistics? I think financial statement analysis is proceeding from ratio analysis. So, here we should decide some objectives of the chapter.

Objectives of Financial Statement Analysis:

Meaning of Ratio Analysis

Steps in Ratio Analysis

Classification of Ratio

Merits and Demerits of Ratio Analysis

Compute the Different Ratios

At 1st we will discuss about ratio analysis. Normally, ratio is known as the relationship between two or more variable expressed in:

1. Percentage
2. Rate
3. Proportion

In another word we can say that ratio analysis is the important technique of financial analysis.

There are some steps also which involves in the ratio analysis:

a. Collection of information, which are relevant from the financial statements and then to calculate different ratios accordingly.
b. Comparison of computed ratios of the same organization or with the industry ratios.
c. Interpretation, drawing of inference and report-writing.

There are some formulas of Balance Sheet Ratio Analysis:

1. Current Ratio

Current Ratio = Current Assets/Current Liabilities

2. Quick Ratio

It is also known as liquid ratio or acid test ratio

Liquid Ratio = Quick or Liquid Assets/Liquid or Current Liabilities

= Current Assets – (Stock and Prepaid Expenses)/Current Liabilities-Bank Overdraft

3. Net working capital Ratio

Net working capital is used to measure company’s liquid position.

Net working capital Ratio = Net Working Capital/Net Assets

4. Proprietary Ratio

Proprietary Ratio = Shareholder’s Funds/Total Assets or Total Resources

5. Capital Gearing Ratio

Capital Gearing = Fixed Interest Bearing Funds/Equity Share capital

6. Debt Equity Ratio

Debt-Equity Ratio is calculated as follows:

Debt-Equity Ratio = External Equities/Internal Equities

Debt-Equity Ratio = Outsiders’ Funds/Shareholder’s Funds

As a long-term financial ratio it may be calculated as follows:

Debt-Equity Ratio = Total Long-Term Debts/Total Long-Term Funds

Debt-Equity Ratio = Total Long – Term Debts/Shareholders’ Funds

Here I want to share some important terms which will define the ratio:

Net profit ratio is used to measure the overall profitability and hence it is very useful to proprietors.

A higher working capital turnover ratio shows that there is low investment in working capital and vice-versa.

Ratio analysis is a very important and useful tool for financial analysis.

It helps the management accounting of business concern in evaluating its financial position and efficiency of performance.

1st thing is trail balance purpose. It is prepared to check not only arithmetical accuracy of ledger balances but also to take an overview of the operations of the business as on a particular date. It is prepared on the basis of weekly, monthly, quarterly, half yearly and yearly. A trail balance contains the elements of financial statements – assets, liabilities, equity, income and expenses.

How to Prepare Trail Balance

I will give an example of trail balance preparation. We make an assumption that the capital of M/s XYZ as on 1st August 2006 was Rs. 1, 05,000 then the format will be:

Trail Balance As on 31st August, 2006

This is not solved. It is only format of trail balance sheet.

Final Accounts

Final accounts popularly known as the profit and loss account and the balance sheet are together called the final accounts.

Now, I want to let you know about the terms of trail balance and final accounts.

Error of Principle is the term of balance accounting and it is known as a principle and concepts. It is an error and it is committed because of lack of proper knowledge of accounting principles or concepts of finance.

Like it there are some more – error of omission, error of commission, compensation error, trading account, profit and loss account, profit and loss appropriation account, balance sheet, suspense account, gross profit and net profit. These terms are commonly known for trail balance and final accounts chapter. I will write about in the further chapter as more details.