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Meaning and Definition of Finance

Meaning and Definition of Finance
Meaning and Definition of Finance Meaning of Finance The science that describes the management, creation and study of money, banking, credit, investments, assets and liabilities. The financial systems include the public, private and government spaces, and the study of finance and financial instruments, which can relate to countless assets and liabilities. Finance is divided into three distinct categories: public finance, corporate finance and personal finance, all three consisting of  many sub-categories. The one word which can easily substitute finance is “exchange.” Finance is nothing but an exchange of available resources. Finance is not restricted only to the exchange and/or management of money. A barter trading system is also a type of finance. Thus, we can say, Finance is an art of managing various available resources like money, assets, investments, securities, etc. Some Definitions of Finance The concept of finance includes capital, funds, money, and amount. But each word has its unique meaning. Studying and understanding the concept of finance becomes an important part of the business concern. Definition of Business Finance According to the Wheeler, “Business finance is that business activity which concerns with the acquisition and conversation of capital funds in meeting financial needs and overall objectives of a business enterprise”. According to the Guthumann and Dougall, “Business finance can broadly be defined as the activity concerned with planning, raising, controlling, administering of the funds used in the business”. In the words of Parhter and Wert, “Business finance deals primarily with raising, administering and disbursing funds by privately owned business units operating in non-financial fields of industry”. The term finance comes from the Latin “finis” which means end or finish . It is a term whose implications affect both individuals and businesses, organizations and states it has to do with obtaining and using or money management – Ivan Thompson According to Bodie and Merton, finance is the “study how scarce resources are allocated over time”. Corporate Finance Corporate finance is concerned with budgeting, financial forecasting, cash management, credit administration, investment analysis and fund procurement of the business concern and the business concern needs to adopt modern technology and application suitable to the global environment.   Corporate finance is the area of finance dealing with the sources of funding and the capital structure of corporations and the actions that managers take to increase the value of the firm to the shareholders, as well as the tools and analysis used to allocate financial resources.   The financial activities related to running a corporation. A division or department that oversees the financial activities of a company. Corporate finance is primarily concerned with maximizing shareholder value through long-term and short-term financial planning and the implementation of various strategies. Everything from capital investment decisions to investment banking falls under the domain of corporate finance.   According to the Encyclopedia of Social Sciences, “Corporation finance deals with the financial problems of corporate enterprises. These problems include the financial aspects of the promotion of new enterprises and their administration during early development, the accounting problems connected with the distinction between capital and income, the administrative questions created by growth and expansion, and finally, the financial adjustments required for the bolstering up or rehabilitation of a corporation which has come into financial difficulties”. The core corporate finance principles can be stated as follows: The Investment Principle: It is better to invest in assets and projects that yield a return greater than the minimum acceptable hurdle rate. The hurdle rate should be higher for riskier projects and should reflect the financing mix used—owners funds (equity) or borrowed money (debt). Returns on projects should be evaluated  based on cash flows generated and the timing of these cash flows; they should also...
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Costing and Profitability

Costing and Profitability
Costing and Profitability Analysis Relationship between Cost of Production and Sales Volume: The cost of production and volume of sales are the inter-dependent determinants of profit. The analysis of cost behavior in relation to the changing volume of sales and its impact on profit is very important to determine the break even level of a firm. The level at which total revenue equals total costs, is said to be the break even level where there is no-profit or no-loss. Sales beyond break-even volume bring in profits. Generally production is preceded by the process of demand forecasting, to decide on the volume of production, the produce of which will be absorbed by the market. Pricing and promotions come at a later stage. Costing is done to predict the costs of production and resultant profits at various levels of activity. Download this comprehensive power-point presentation on Break-Even Analysis. Cost Volume Profit or CVP Analysis: CVP analysis or Cost-Volume-Profit analysis helps a firm to study the interrelationship between these three factors and their effect on clean profit. The process also includes an analysis about the external factors that affect the volume of production, such as market demand, competitor threat and internal factors such as availability of infrastructure, capital and labor force. This CVP analysis is a boon to the managers to locate the bottlenecks that hinder the productivity and find a way out, by adjusting either the levels of activity or controlling the cost.   Picture Courtesy : The Power of Break-Even Analysis Pricing: Pricing is the most important factor that makes your product competitive. The costs of production can be classified into fixed costs, variable costs and semi variable costs. Fixed costs remain constant and tend to be unaffected by the changes in volume of output; whereas variable costs vary directly with the volume of output and semi-variable as the name implies are partly fixed and partly variable. Cost accountants of the modern era fully support variable costing for the purpose of cost accounting, listing its merits as follows: Variable costing talks about contribution margin, which is the excess of sales over variable costs. If this is going to be high, sufficient enough to cover the fixed costs, then profit is assured for the firm. It is a key factor to determine the percentage of profit. Variable costing assigns only those costs to a product that varies directly with the changing levels of production, which is helpful in making a distinction of profit made from sales and those resulting from changes in production and inventory. Segregating the costs into fixed and variable is done for the purpose of providing information to reflect cost-volume-profit relationships and to facilitate management decision-making and control. Some applications of variable costing that facilitates management decision making: Profit planning: By increasing the volume of sales or decreasing the selling price of the product. Performance evaluation of profit centres:Like, sales division, marketing department, product line etc., Decide on product priorities: In view of market potential and profit potential Make or Buy Decisions: Depending on the production capacity and sales demand. Budgeting: Flexible budgeting and cost control are possible by variable costing technique and the striking feature is the treatment given to fixed costs, where it is treated as a period cost and not apportioned among all the departments and products that enable the firm to understand the movement of profits in the same direction as that of the sales. Although considered to be a controversial technique and weighed against the conventional methods of costing such as absorption costing, it is believed that it is to stay and exist as the next step in the evolutionary method of cost accounting....
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Management vs. Financial Accounting

Management vs. Financial Accounting
Management Vs. Financial Accounting Management Accounting : The process of preparing management reports and accounts that provides accurate and timely financial and statistical information to the management Financial Accounting : The purpose of accounting is to provide the information that is needed for sound economic decision making concerned with classifying, measuring and recording the transactions of a business. What is Management Accounting: Management accounting is the updated version of what you call financial accounting and the most circulated term in corporate business arena. Management involves planning, organizing, staffing, leading and controlling the resources available in an organization, namely the physical and human resources. Much importance is given to personnel management as they are the priceless assets of any organisation.But it is equally important for a firm to record all its business transactions for future reference and tax audits. Thus the necessity of accounting comes into the fray. Financial Statements Made Easy Functional Difference: Well, accounting means something to do with finance. So, what is the big difference, if it is financial or management accounting? One difference is in the title, and the other in their function. The rationale behind financial accounting is statutory, done for the benefit of shareholders, customers, government regulatory agencies, other external agencies, potential investors and the like. It records all business transactions that are purely monetary in nature and no further analysis is done. Essential for Management Planning: Management accounting is voluntary and reports are prepared to meet the internal needs of management. We talked about planning, for which interpretation and analysis of such quantitative data and other inputs becomes necessary to plan for future needs of management. The main functions being attention direction and problem solving, management accounting is primarily concerned with providing information relating to the various aspects of a business, like cost or profit associated with some portions of business operations. It employs techniques such as standard costing, budgeting, marginal costing, break- even analysis and so on., Inputs also stem from industry data, competitor data, published reports by public and private agencies and research studies findings, thus widening its scope for improvement in business operations. Financial Accounting: Financial accounting is restricted to deal only with “generally accepted accounting principles” and any deviation is considered to be errors for correction. Though it provides valid and authentic information, it lacks timeliness. The former restricts the accountant to a mere book-keeper while the latter transcends the role of the accountant to that of total business information technologist. Here he becomes an evaluator of different functional areas like marketing, production, purchase and personnel. As modern business is huge in size, complex, diversified and decentralized in terms of operations, financial accounting just does not fill the bill, as information is required as when an event happens at various hierarchical levels of an organisation. This infographic from Goodaccountants.com  details the industries that employ the most accountants and auditors, and the results are very interesting!  Management accounting is inter disciplinary in character and derives inspiration from organizational theory, economics, behavioral sciences, statistics and management. Although the paraphernalia required for management reporting is complex and expensive, it is worth the try, as it tries to compare and contrast the actuals with the standards and bring out variances if any. This is quite useful in determining the cost-effectiveness of a particular project or to be prepared for suitable action. Management accounting is nothing but a management information system where the managers have to be techno-savvy in order to handle the total information resource and project it suitably to the management to take timely actions for the increase in growth, profit and sustainability of the...
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Budget Planning

Budget Planning
Budget Planning Quantification of Objectives in the form of Budgets Effective and efficient management of a business enterprise is facilitated, when a firm charts its course of action in advance. The management function also includes decision-making supported by various managerial techniques and tools that integrate the activities of the employees of the organization. One such systematic approach to profit planning is budgeting. The prime concern of budgeting is to make profits by regulating the flow of funds and allocating the controlling function to various responsibility centers. Don’t know how to start budgeting? Do you need to know how to make a budget ? This infographic will provide personal budget categories you can use to help you categorize expenses for budgeting purpose. This may or will save you time, money, and effort. What is a Budget? A budget is a comprehensive and coordinated financial plan, charted for a specific period of time in the future, but well in advance. It facilitates to compare the actuals with the standards established and review or revise the plans accordingly in case of any deviations or variances. A budget is a plan that is concerned not only about the resources of a firm, but also its operations. It involves the control and manipulation of relevant variables-controllable and non-controllable, and reduces the impact of uncertainty. Economic Constraints in Developing Countries The global economy has its imposing influence on the budget of developing countries, where it is always a deficit budget, the countries finding it difficult to allocate the meager resources available among the different sectors of economy competing for the same. Problems of unemployment, inflation and crude oil prices touching a dangerous high, these countries can offer only piecemeal measures to sustain the momentum of economic growth. Master Budget Talking about organizations going for the master budget at the start of the year, comprise budgets for various segments of the enterprise. The budget for a segment or department will not have much significance unless it is a part of the total budget-the master budget. If the budgets for various segments are not prepared jointly and in harmony with each other, the master budget will lose much of its importance and may even prove to be harmful in realizing the firm’s expectations. A budget is always expressed in financial terms, either in rupees, dollars or pounds, for operational purposes. Say, in a production budget, you talk about units of raw material and finished product. In a labor budget, you talk about men and labor hours. So there must be a common denominator, which can express all these variable quantities in a common language for the comprehensive budget to be meaningful. This purpose is solved by money, which undoubtedly serves as the common denominator. Budget Mechanism A budget is a mechanism to plan for the firm’s operations and activities. It allocates resources as well as responsibilities to different operational centers like, revenue, cost, profit and investment centres. Time dimension must also be added to a budget. For example, a production target of ten thousand units or a profit target of ten million dollars has no meaning unless and until it is related to a specific time period, in which these targets have to be met. A firm may have its long-range and broad objectives, such as maximum sales, maximum profits, customer satisfaction, social responsibilities, etc., But, to achieve these qualitative objectives, a firm has to quantify the same in the form of short-term objectives or goals with a time period precisely specified. A budget is basically a control technique which also facilitates to measure the performance of individuals on the basis of which, corrective action can be...
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