What is Business Risk? It is a term that explains the difference between the expectation of return on investment and actual realization. In CAPITAL BUDGETING, several alternatives of investments are examined before taking an investment decision and only then the Managing Director of the firm along with financial executives gear up for investing in a project that is sound and feasible. Even then the project may not become viable owing to the fluctuations in the economic environment. Money Manipulation So, the million dollar question arises, whether to invest and if invested, will it fetch me profit? See, you cannot have the cake and eat it too. Risk factor prevails in all kinds of environment and we try to over react in a business arena since it involves huge investments. But remember, MONEY WILL MULTIPLY IF YOU MANIPULATE IT WITH CARE. Business firms commit large sums of money each year for capital expenditure. It is therefore essential that a careful FINANCIAL APPRAISAL of each and every project which involves large investments is carried out before acceptance or execution of the project. These capital budgeting decisions generally fall under the consideration of highest level of management.  Factors of risk to be considered before investing: Time value of money Pay back period Rate of return on investment(ROI) Uncertainties in the market Cost of debt Cost of equity Cost of retained earnings Factors to be monitored after investing: Maximising profit after taxes Maximizing earnings per share Maintaining the share prices Issue of dividends Ensuring management control Financial structuring Cost of capital refers to the opportunity cost of the funds to the firm I. e., the return on investment to the firm had it invested these funds elsewhere. Servicing the debt and Danger of Insolvency While making the decisions regarding investment and financing, the Finance Manager seeks to achieve the right balance between risk and return. If the firm borrows heavily to finance its operations, then the surplus generated out of operations should be sufficient to “SERVICE THE DEBT” in the form of interest and principal payments. The surplus would be greatly reduced to the owners as there would be heavy Debt Servicing. If things do not work out as planned, the situation becomes worse, as the firm will not be in a position to meet its obligations and is even exposed to the “DANGER OF INSOLVENCY“. Working Capital Management Considering all these factors, we have to come to the conclusion that FINANCIAL MANAGEMENT is like the BACKBONE of a business firm and WORKING CAPITAL MANAGEMENT will be the blood flow infused into the body. Risks are inherent in a business environment whose management is quite possible with the right kind of farsightedness and planning. Luck does not favor anybody who is poor in planning and lack hard...

What is Budget Planning and Why is it Important? 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 technique is having a budget planned that which is essential for a healthy future. The 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 budget planning ? 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. Getting Your Budget Approved 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 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. Pic Courtesy: Avail Talking about organizations going for the master budget at the start of the year, it comprises budgets for various segments of the enterprise and it forms the primary step in budget planning. Master Budget 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 taken. The crux...

Significance of Operations Management: Business firms need to formulate brilliant operations strategies in order to survive in the market for long. Focus on finance and marketing alone is not sufficient to compete in the global market. The emergence of innovative products and processes from leading companies in different parts of the world is a clear-cut evidence to prove the significance of operations function. Operations management is gaining importance, thanks to public awareness on quality and its applicability in service operations too. Advent of Industrial Revolution: Until the advent of machinery, each and every nation was dependent on agriculture, which was the prime economic activity. After the industrial revolution of the eighteenth century, mechanization in a large scale converted agricultural economy to an industrial economy. Slowly scientific principles were introduced into production activities to make it more systematic and thus “Production Management” evolved. Now service operations have also gained momentum and since the concepts and techniques of production management are applicable to service operations too, it is rightly called as “Operations Management.” Operations management functions at three different levels. Strategic levelTactical levelOperational level Strategic level: At the strategic level, the operations manager must have a long term vision, as to shape up the company’s success in the light of strategic decisions taken, with the approval of the top management. His area of concern would be, New product developmentNew process developmentProduct re-designProcess re-designProcess layoutProduct layoutFacility locationAggregate capacity planningPlanning co-ordination with finance and marketing departments Tactical level: At the tactical level, the operations manager is concerned about the planning and scheduling operations of the desired output. His area of concern would be: Designing a suitable inventory systemPlan for the work force and train them effectivelyQuality control systemMaintenance andReliability assurance system. Operational level: At the operational level, the job of the operations manager is to accomplish the “set targets”, by performing various coordinating and controlling functions. His area of concern would be: Ordering materials at the right timeScheduling productionScheduling workers as per production requirementControlling quality of goods and services producedFollow up of various schedules for proper implementationMaintaining and updating equipment and system reliabilityOn the job skill development of workers, etc. These functions are by no means exhaustive, but only indicative. The process of planning and control operations is not done in water tight compartments, but are interactive and integrative feeding on one another and also aligned in line with the overall corporate objectives. The strategies are evolved for the purpose of efficient utilization of the available resources as well as to predict the changes in the external business environment that calls for suitable action to limit their impact on the goals of the organization, in terms of cost, quality and...

Locational Attributes for a Plant Layout The location of an industrial plant plays a vital role in determining its success. Management should weigh the pros and cons of the location in terms of cost and revenue as each location might influence these variables in different proportions. Let us try to understand the need for a new facility location. Entrepreneurs interested in starting a new business venture or a small-scale enterprise has to look out for appropriate location for plant installation. Manufacturers who plan to expand their product range needs additional plant capacity Multinational corporations trying to establish their markets through subsidiaries Obsolete plants have to be shut down and new location has to be identified. The location attributes described below are fundamental in the decision to locate an industry. Although for particular firms some are more important than others, a significant shortfall in an area’s ability to provide even one of these may greatly reduce the attractiveness of that site. Labor The management will be interested in such locations where there is adequate supply of labor. Some operations need skilled labor and some unskilled. The cost of labor is an important factor to be considered as it influences labor productivity. However, low labor cost is not necessarily an advantage, if the workers are poorly educated and trained. The management has to be mentally prepared to pay for skilled labor who have the training and experience needed for the planned operation. Energy resources Electricity and water are major energy resources needed for production activities. For example, a textile mill needs to have round the clock power supply, for continuous production and a dyeing plant is in need of copious water supply. These industries will be on the look out for a location that has abundant energy resources available at low cost. Transportation The industry has to be located near the market so that the produce can quickly reach the market making the transportation costs minimum. Domestic trade heavily relies upon road transport as there are numerous service providers and there is well-developed infrastructure connecting even the remotest of locations. International trade takes place through either airways or waterways. In places like Kerala, inland waterways help in transporting merchandise within the domains of the territory. Raw materials availability Many businesses depend on materials of various types such as unprocessed raw materials for use in manufacturing and finished goods for inventory, in wholesale and retail establishments. The availability and cost, including transportation costs of these materials are critical location factors. Other Factors Other factors that influence location decisions are government regulations, climate and environmental quality of an area, soil texture, and attitudes of state and local governments’ etc. The economic viability of a project is undoubtedly enhanced by appropriate location. The location should also conform to environmental protection laws to maintain the ecobalance of that particular habitat. Organizations are expected to dispose of with the effluents in a systematic manner and this has to be kept in mind while choosing a location. The GEMBA Walk: A gemba (and sometimes genba) walk is the term used to describe personal observation of work – where the work is happening. The original Japanese term comes from gembutsu, which means “real thing.” It also sometimes refers to the “real...

Minimize Movement and Maximize Productivity Manufacturing organizations handle many types of materials in their production environment. Raw materials, materials-in-progress, finished goods, accessories, components, packaging materials, maintenance and repair supplies, scrap and many more must be handled in an efficient manner to make the operations cost-effective and to avoid wastage. The principle behind material handling process is said to be “no handling”, which is not practicable in reality. So it would be appropriate to say, that the objective of materials handling would be, to reduce the number of handlings as well as reducing the distances through which the materials are handled. Why efficient materials handling is inevitable in a manufacturing set-up? The movement of materials from the receiving area to the shipping area through the production line does not add value to the product but only to the cost. Further, plant layout and materials handling are complementary to each other. A production facility must incorporate a good plant layout that enhances the efficiency of movement of materials with ease and should deliver maximum productivity. Principles for Efficient Materials Handling There are certain principles that serve as a guide for efficient materials handling. These provide a framework for selecting specific materials handling equipments that form the core of the production system. Eliminate handling-If not, reduce the distance travelled by the materials Keep moving-If not, reduce the time spent at crucial points Simple patterns of material flow is appreciated-If not, reduce back tracking, cross overs, congestion Carry pay loads Carry full loads Use reliable and inexpensive source of power Materials handling should be considered in the light of movement of men, machines, tools and information. It also depends on the type of product manufactured, quantity, value and size of the organization. Cost effectiveness can be achieved if the firm is able to reduce the manufacturing cycle time through faster movement of materials and thus work-in-progress inventory costs can also be controlled and reduced. Design of the plant layout that facilitates sequential flow of materials through the production facility, improved working conditions, safety in the movement of materials, contribution to better quality by avoiding damage to the materials due to inefficient handling and workers being appraised about the importance of smooth materials handling result in higher productivity at lower manufacturing cost. Factors to considered while deciding on material handling equipments Adaptability, flexibility, load capacity, power, speed, nature of supervision required, space requirements, ease of maintenance, environment friendliness and cost are some of the factors to be taken into consideration while deciding on the type of material handling equipments. Also, the capabilities of manpower to operate the equipment and safety of personnel cannot be overlooked. It is important to select and design, materials handling system that are expensive to purchase and operate. For instance, if overhead cranes are to be used, the structure of the building should be strong enough to support the installation. Spacious aisles are mandatory if the loads are heavy and transported across the shop floors. Equipments used Elevators, hoists, industrial trucks like fork-lift trucks, pallet trucks, pipelines, automatic transfer devices, automated guided vehicles, and industrial robots are some of the handling equipments that have found their ideal place in this process. Materials handling activity should be evaluated like any other activity to gauge its effectiveness. The focus should be on the manufacturing cycle efficiency, equipment utilization, percentage of time lost, total number of moves and material handling costs as percentage of manufacturing...