From the introductory chapter we have learned that always the goal of a corporation

should be wealth maximization objective rather than profit maximization. Because

profit maximization objective does not consider Time Value of Money longevity of
project maximization of !hare "rice and corporate social responsibility.
#e also learned that the conflict that fre$uently happens between managers and
owners are generally %nown as agency problem.
!o in order to minimize this agency problem usually the following procedures are
ta%en. These are&
(1) Market Forces :
'nder this approach firstly we need to elect the Board (f )irectors and then give
them the empowerment to hire or fire. *n addition they also have the power to expel
under performing management as well as providing threat of hostile ta%eover to the
management to perform in the best interest of the shareholders otherwise the owner
may thin% about the possibility of a hostile ta%eover.
(2)Agency Costs&
+ conflict of interest arising between creditors shareholders and management
because of differing goals. *t is defined by the costs borne by stoc%holders to prevent
or minimize agency problem. For example an agency problem exists when
management and stoc%holders have conflicting ideas on how the company should be
run. Through the following four types we can perform the
functions of +gency costs.
(i) Monitoring Expenses
These outlays give for audits , control procedures that are used to asses and limit the
managerial behavior to those actions tends to be in the best interest of the owners.
(ii)Bonding Expenses
This approach helps to protect against the potential conse$uences of dishonest acts by
managers. Typically the owners pay a third party bonding company to obtain a
fidelity Bond. This bond -fidelity. is a contract under which the bonding company
agrees to reimburse the firm for up to a stated amount if a bonded managers dishonest
act results in financial loss to
the firm.
-iii. (pportunity costs& +ctually this type of costs developed from the difficulties that
large organizations typically have in responding to new opportunities. The firms
needed organizational construction choice hierarchy and organize mechanisms may
cause profitable opportunities to be forgone because of managements inability to seize
up on them $uic%ly.
-iv. The most popular powerful , expensive agency costs incurred by firms are
!tructuring /xpenses. *t includes providing managerial compensation and incentive
plans that tend to tie management compensation to share price. The most popular
incentive plan is the yielding stoc% of options to administration.

-a. + stoc% option enables employees to purchase shares of a given class in
consideration for a pre0determined amount referred to as the exercise price. The
employees profit from a rise in the price of the shares since the exercise price is pre0
determined but they have not yet paid for the shares. (bviously options already have
an economic value when they are allotted since they award employees the right to
buy shares for a fixed exercise price but they are not committed to such payment
unless they choose to exercise them. 1iving way of !toc% options to management
permit managers to purchase stoc% at the mar%et price set at the time of the grant.
They will be pleased by being able to resell the shares subse$uently at the higher
mar%et price if the mar%et price rises.
(n the other hand there are also problems in granting stoc% options to employees. For
instance a decline in the value of the options due to daily mar%et fluctuations may
lower the employees2 motivation. *n addition the decision of who will be
compensated may cause problems with non0compensated employees -including good
middle management.. *n practice almost all companies now grant options to all
employees in managerial positions and it is not uncommon to see companies in which
all employees junior and senior receive options. *n addition some restrictions are
imposed by the securities laws on the distribution of securities to employees and the
distribution of options or other securities to employees involves a They are some
times criticized because positive management performance can be mas%ed in a poor
stoc% mar%et in which share prices general have declined due to economic and
3behavioral mar%et forces outside of management4s control.

-b. "erformance plans& This type of approach includes the use of routine plan has
mature in popularity in recent years due to their relative independence from mar%et
forces. + performance appraisal is a process in which a rater or raters evaluate the
performance of an employee. More specifically during a performance appraisal
period rater-s. observe interact with and evaluate a person4s performance. Then
when it is time for a performance appraisal these observations are documented on a
form. The rater usually conducts a meeting with the employee to communicate
performance feedbac%. )uring the meeting the employee is evaluated with respect to
success in achieving last year4s goals and new goals are set for the next performance
appraisal period.
/ven though performance appraisals can be $uite effective in motivating employees
and resolving performance problems in reality only a small number of organizations
use the performance appraisal process to its full potential. *n many companies a
performance appraisal ta%es the form of a bureaucratic activity that is mutually
despised by employees and managers. The problems a poor appraisal process can
create may be so severe that many experts including the founder of the total $uality
movement /dward )eming have recommended abolishing appraisals altogether.
These plans reimburse managers on the basis of their confirmed performance
measured by earning per share and other ratios of return. *n addition another form of
performance based compensation is cash bonuses where cash payments united to the
accomplishment of certain performance goals.
!o by following the above mentioned way we can easily minimize our corporation4s
agency problem.
5esponsibility of finance manager&
+lmost every firm government agency and organization has one or more financial
managers who oversee the preparation of financial reports direct investment
activities and implement cash management strategies. +s computers are increasingly
used to record and organize data many financial managers are spending more time
developing strategies and implementing the long0term goals of their organization.
The duties of financial managers vary with their specific titles which include
controller treasurer or finance officer credit manager cash manager and ris% and
insurance manager. 6ontrollers direct the preparation of financial reports that
summarize and forecast the organization2s financial position such as income
statements balance sheets and analyses of future earnings or expenses. 6ontrollers
also are in charge of preparing special reports re$uired by regulatory authorities.
(ften controllers oversee the accounting audit and budget departments. Treasurers
and finance officers direct the organization2s financial goals objectives and budgets.
They oversee the investment of funds and manage associated ris%s supervise cash
management activities execute capital0raising strategies to support a firm2s expansion
and deal with mergers and ac$uisitions. 6redit managers oversee the firm2s issuance
of credit. They establish credit0rating criteria determine credit ceilings and monitor
the collections of past0due accounts. Managers specializing in international finance
develop financial and accounting systems for the ban%ing transactions of
multinational organizations.
6ash managers monitor and control the flow of cash receipts and disbursements to
meet the business and investment needs of the firm. For example cashflow
projections are needed to determine whether loans must be obtained to meet cash
re$uirements or whether surplus cash should be invested in interest0bearing
instruments. 5is% and insurance managers oversee programs to minimize ris%s and
losses that might arise from financial transactions and business operations underta%en
by the institution. They also manage the organization2s insurance budget.
Financial institutions such as commercial ban%s savings and loan associations credit
unions and mortgage and finance companies employ additional financial managers
who oversee various functions such as lending trusts mortgages and investments or
programs including sales operations or electronic financial services. These
managers may be re$uired to solicit business authorize loans and direct the
investment of funds always adhering to Federal and !tate laws and regulations.
Branch managers of financial institutions administer and manage all of the functions
of a branch office which may include hiring personnel approving loans and lines of
credit establishing a rapport with the community to attract business and assisting
customers with account problems. Financial managers who wor% for financial
institutions must %eep abreast of the rapidly growing array of financial services and
products.
*n addition to the general duties described above all financial managers perform tas%s
uni$ue to their organization or industry. For example government financial managers
must be experts on the government appropriations and budgeting processes whereas
healthcare financial managers must be %nowledgeable about issues surrounding
healthcare financing. Moreover financial managers must be aware of special tax laws
and regulations that affect their industry.
Financial managers play an increasingly important role in mergers and consolidations
and in global expansion and related financing. These areas re$uire extensive
specialized %nowledge on the part of the financial manager to reduce ris%s and
maximize profit. Financial managers increasingly are hired on a temporary basis to
advise senior managers on these and other matters. *n fact some small firms contract
out all accounting and financial functions to companies that provide these services.
The role of the financial manager particularly in business is changing in response to
technological advances that have significantly reduced the amount of time it ta%es to
produce financial reports. Financial managers now perform more data analysis and
use it to offer senior managers ideas on how to maximize profits. They often wor% on
teams acting as business advisors to top management. Financial managers need to
%eep abreast of the latest computer technology in order to increase the efficiency of
their firm2s financial operations
*n the second chapter we have learned about the capital structure.
6apital structure is the ratio of using e$uity and debt in the organization. #hen a
company use more debt in 6apital structure then the ris% will be higher.
The Board of )irectors or the financial manager of a company should always
endeavor to develop a capital structure that would lie beneficial to the e$uity
shareholders in particular and to the other groups such as employees customers
creditors society in general. #hile developing an appropriate capital structure for its
company the financial manager should aim at maximizing the long0term mar%et price
per share. This can be done only when all these factors which are relevant to the
company4s capital structure decisions are properly analyzed and balanced.
*n finance capital structure refers to the way a corporation finances its assets through
some combination of e$uity debt or hybrid securities. + firm2s capital structure is
then the composition or 2structure2 of its liabilities. For example a firm that sells 789
billion in e$uity and 7:9 billion in debt is said to be 89; e$uity0financed and :9;
debt0financed. The firm2s ratio of debt to total financing :9; in this example is
referred to as the firm2s leverage. *n reality capital structure may be highly complex
and include dozens of sources. 1earing 5atio is the proportion of the capital
employed of the firm which come from outside of the business finance e.g. by ta%ing
a short term loan etc.
6apital structure suitable for the new firm &
*n case newly introduced firm it is always recommended that the firm should finance
its fund from only e$uity capital. 6ontrary to widely held beliefs that startup
companies rely heavily on funding from family and friends a <auffman Foundation
research paper released today reported that external debt financing such as ban% loans
are the more common sources of funding for many companies during their first year
of operation. +ccording to the study nearly => percent of most firms2 startup capital is
made up in e$ual parts of owner e$uity and ban% loans and?or credit card debt
underscoring the importance of li$uid credit mar%ets to the formation and success of
new firms.
6apital structure suitable for the growing firm &
*n case growing firm it is always recommended that the firm should finance its fund
from both e$uity capital and debt capital %eeping in mind that the portion of debt
capital obviously less than maturing firm. !ituation will determine about how much
debt and e$uity capital are re$uired to finance for that type of firm.
6apital structure suitable for the mature firm &
*n case of mature firm it is always recommended that the firm should finance its
fund from both e$uity capital and debt capital. *n that case the portion of debt capital
is the highest than that of growing and newly introduced firm.
*n general we should remember that optimum capital structure -where weighted
average cost of capital is the lowest. is always suitable for firm.
*f the firm4s business ris% is higher and at the same time financial ris% is lower it is
suggested that the firm should use more e$uity capital and small portion of debt
capital. (n the other hand if the firm4s business ris% is lower and at the same time
financial ris% is higher it is recommended that the firm should use more debt capital
and small portion of e$uity capital. For example in case of "etro0Bangla business ris%
is higher and at the same time financial ris% is lower. !o it is suggested that the firm
should use more e$uity capital and small portion of debt capital. +gain if we consider
in case of T@T here we see that the firm4s business ris% is lower and at the same
time financial ris% is higher. That4 it is recommended that the firm should use more
debt capital and small portion of e$uity capital.
!imilarly if the firm4s tax position is higher the firm is more li%ely suitable to use
more debt since interest on debt is tax deductable item. (n the other hand if the firm
is low tax brac%et the firm need to use low debt capital in order to minimize the ris%.
+part from this financial flexibility is another factor that also affect the capital
structure decisions.#here interest rate is higher li%e developing countries-for example
Bangladesh. it is said that there is less financial flexibililty exists in that countries. *t
happens because of higher demand in compare to the lower supply. (n the contrary
where is less interest rate li%e developed countries-for example Aapan. it is said that
there is more or high financial flexibility exists in that countries. *t is just as a result of
lower demand in comparison to the total supply. *n addition managerial attitude is
another one of the important factors that determine capital structure decisions. *f the
managers are aggressive in nature they are more li%ely to ta%e debt capital. But if the
managers are conservative in nature they are less li%ely to finance their firm4s capital
from debt capital.
The various factors affecting the capital structure decision are
Management Attitudes: Management4s attitude concerning control of enterprise and
ris% involved determine the debt or e$uity in the capital structure and any analysis of
capital structure planning can hardly afford to ignore this factor. *n fact every addition
of e$uity unit in the capital structure presents management to participate in the
company affairs to that extent. Therefore while planning capital structure firms may
prefer debt to be assumed of continued control.
Cash fo! a"iity of the company: #hen considering the appropriate capital
structure it is extremely important to analyze the cash flow ability of the firm to serve
fixed commitment charges. The fixed commitment charges include payment of
interest on debentures and other debts preference dividend and principal amount.
Thus the fixed charged depend upon both the amount of senior securities and the
terms of payment. The amount of fixed charges will be high if the company employs a
large amount of debt or preference capital with short0term maturity. *t is therefore
prudent that for servicing fixed charges at proper time the management must ensure
the availability .of cash because inability on the part of management may result in
financial insolvency. Therefore cash flow analysis is essential to consider while
planning appropriate capital structure. (bviously the greater and more stable the
expected future cash flows of the firm the greater the debt capacity and vice0versa.
To be on a safe side the cash flow ability must be determined in the period of
depression very carefully.

Assets #tructure: 6omposition and li$uidity of assets may also influence the capital
structure decision of the firm. Firms with long lived fixed assets especially when
demand for their output is relatively assured utilities for example B use long0term debt
extensively similarly greater the li$uidity the more debt that generally can be used all
other factors remaining constant. The less li$uid the assets of firm the less flexible the
firm can be in meeting its fixed charged obligations
$e%erage or &rading on e'uity: Trading on e$uity or leverage refers to the financial
process. This enables the owners of a company to enhance their return on e$uity by
borrowing funds for one rate of interest and using the money to earn a higher rate of
return %eeping the different for themselves. *t is thus called ma%ing money by using
other people4s money. !ome of the main conclusions regarding the leverage in the
capital structure such as use of fixed cost or fixed return sources of finances may be
reemphasized. )ebts and pre share capital results4 into magnifying the earnings per
share -/"!. prevailed the firm earns more on the assets purchased with these funds
than the cost of their use. /arnings before interest and taxes -/B*T. and /"!
relationship are the means to examine the effect of leverage. (ut of per share capital
and debt4 the leverage impact is felt more in the case of debt because their source of
finance costs lower than per share capital and also the interest payable on debt is tax
deductible. The use of fixed cost sources of finances also adds to the financial ris% of
the company and therefore it should not be used beyond a point where the amount of
fixed commitment charges e$uals the level of /B*T. To give up because of its effect
on /"! financial leverage is one the important consideration in planning the capital
structure for the company.
Then we learned the topic on C#or%ing capitalD.
#or%ing capital is that part of company4s capital which is used for purchasing raw
material and involve in sundry debtors. #e all %now that current assets are very
important for proper wor%ing of fixed assets. !uppose if you have invested your
money to purchase machines of company and if you have not any more money to buy
raw material then your machinery will no use for any production without raw
material. From this example you can understand that wor%ing capital is very useful
for operating any business organization. #e can also ta%e one more li$uid item of
current assets that is cash. *f you have not cash in hand then you can not pay for
different expenses of company and at that time your many business wor%s may delay
for not paying certain expenses. *f we define wor%ing capital in very simple form
then we can say that wor%ing capital is the excess of current assets over current
liabilities. #or%ing 6apital is the money used to ma%e goods and attract sales. The
less #or%ing 6apital used to attract sales the higher is li%ely to be the return on
investment. #or%ing 6apital management is about the commercial and financial
aspects of *nventory credit purchasing mar%eting and royalty and investment
policy. The higher the profit margin the lower is li%ely to be the level of #or%ing
6apital tied up in creating and selling titles. The faster that we create and sell the
boo%s the higher is li%ely to be the return on investment. Thus when we have been
using the word investment in the chapter on pricing we have been discussing
#or%ing 6apital.
+fter that we had learned the concept on C6urrent +ssets investment policyD.
(ptimal investment in current asset is part of the wor%ing capital management policy
within an organization. +n effective wor%ing capital management re$uires right
amount of investment in current assets and appropriate level of short0term financing.
/xcessive investment in current assets means lac% of funds to invest elsewhere which
shall effect the li$uidity aspect of the company while too little investment means
inability to service the growing demand for the goods which will erode the
profitability of the company.
Therefore it is a matter or finding that e$uilibrium or optimal level of investment in
current asset and a right mix of financing -either short0term or long0term. to support
the investment. 6ompany2s decision of selecting a short0term investment policy must
be based upon maximizing the firm value in the long run while %eeping a balance
between the profitability and li$uidity goals of the company.
1rowth companies should focus on %eeping stoc% of inventory to service the
predicted growth in demand as well as to compete with the local wholesalers.
+lthough the investment in asset will not provide better return as compared to long0
term investment options however the opportunity cost of a sale foregone due to
unavailability of stoc% can %eep the company out of business forever. Eence finding
the right level of investment re$uires a trade0off between minimizing cost without
hindering the li$uidity of business.
6ompany might select an aggressive short0term financing policy whereby it will fund
both its temporary and permanent current assets with the help of short0term finance if
the demand of goods fluctuate and access of short0term finance is readily available.
Manager2s prediction about the movement in short0term interest rate as compared to
long0term interest rate will also affect the decision.
Eowever if a company short0term financing policy were restrictive it would be better
off with a conservative action by funding permanent current asset and part of
temporary current assets with long0term finance. By ta%ing this approach company
can loc% in the cost of funds and avoid any short0term interest rate fluctuations.
(n one hand companies carrying cost components such asF interest expenses
insurance , taxes material handling expenses damage and obsolescence cost will
increase with the increase in inventory investment. (n the other hand its shortage
cost components such asF stoc% out cost lost contribution due to shortage of supply
and customer goodwill foregone will decrease with the increase in investment in
inventory you hold.
+fter that we had studied the most important concept and that is nothing but 6ash
management.
6ash management consists of ta%ing the necessary actions to maintain ade$uate levels
of cash to meet operational and capital re$uirements and to obtain the maximum yield
on short0term investments of pooled idle cash. + good cash management program is
a very significant component of the overall financial management of a municipality.
!uch a program benefits the city or town by increasing non0tax revenues improving
the control and superintendence of cash increasing contacts with members of the
financial community and lowering borrowing costs while at the same time
maintaining the safety of the municipality4s funds.
Businesses must understand cash management for it to be effective. Financial goals
will be harder to achieve without a proven structure. *t is possible that goals are not
achieved and it can be seen that cash management may have ta%en part in it one way
or another. *t2s the fundamental building bloc% of financial planning. There are
various methods of short term financing can also be essential to a successful
businesses. This paper will describe cash management and short term financing. !ome
of the points that will be brought up are managing your wor%ing capital managing
business ris%s and monitoring costs.
#or%ing capital is an essential part of cash management. The level of wor%ing capital
of a business is directly related to the flow of cash into and out of a business. #or%ing
capital is needed to setup a business pay operating costs and continue to operate until
the receivables arrive. )epending on the amount of wor%ing capital the business uses
things
6ash can be effected li%e paying suppliers buying materials and even salaries. * can
be seen that maintaining and managing a particular level of wor%ing capital allows the
business to flex during hard times. @ot understanding and forecasting the need for the
correct amount of wor%ing capital can be devastating to a business.
!hort0term financing can be used to ma%e business purchases that can allow the
company to purchase fixed assets or help a company with less than expected wor%ing
capital. + line of credit can be created with the company2s financial institution and is
normally done before the need should arise to be effective. There are many ris%s
involved in running a business and serious challenges should be expected at some
time in the future. *t is possible to reduce the ris% of possible capital issues by
planning ahead and having a more diversified client base. Eaving the business depend
on the heath of another business is not good practice.
Finally manager should ta%e all the step to receive the money $uic%ly and delay in the
case of disbursement.
#e had also gathered %nowledge on the most important concept 6ommon !toc% that
are fre$uently used in the field of finance.
6ommon !toc% is a security representing a legal claim to a percentage of a
company2s earnings and assets. Eolders of common !toc% have some input into
choosing company management but do not generally have much say in the day to day
operations. *f the common stoc% is publicly traded the company will generally be
re$uired to meet regulatory obligations such as filing audited financial reports.
Eolders of common stoc% are also offered the chance to participate in an annual
meeting where the company may share its vision for the future. *nvestors may
purchase common stoc% if they believe a company will be worth more in the future
than it is valued at in the present. 6ommon stoc% does not always pay a dividend. *f
the company goes ban%rupt common stoc%holders generally lose their entire
investment.
The advantages of issuing common stoc% are 1iven below&
6ommon stoc% has the potential for delivering very large gains +nnual
returns0on0investment -5(*s. of over G99; have occurred on a somewhat
regular basis.
The potential loss from stoc% purchased with cash is limited to the total
amount of the initial investment. This is considerably better than that of some
leveraged transactions where the maximum loss can well exceed the total of
the funds invested.
!toc%s offer limited legal liability. "assive stoc%holders are protected against
any liability stemming from the company4s actions beyond their financial
investment in the company.
Most stoc%s are very li$uidF in other words they can be bought and sold
$uic%ly at a fair price.
+lthough past performance is not a guarantee of future performance stoc%s
have historically offered very high returns in relation to other investments.
!toc%s offer two ways for their owners to benefit by capital gain and with
dividends. +s previously stated each share of stoc% represents partial
ownership in a company. *f the company becomes more valuable so will the
ownership interest
represented by each share of stoc%. This appreciation of the stoc%4s value is %nown as
a capital gain.
!ometime manager ta%e the decision to issue bond in the mar%et for financing. #hen
a company issue bond instead of common stoc% get some extra benefits.
There are several advantages of issuing bonds or other debt instead of stoc% when
ac$uiring assets. (ne advantage is that the interest on bonds and other debt is
deductible on the corporation4s income tax return. )ividends on stoc% are not
deductible on the income tax return.
+ second advantage of financing asset with bonds instead of stoc% is that the
ownership interest in the corporation will not be diluted by adding more owners.
Bondholders and other lenders are not owners of the assets or of the corporation.
Therefore all of the gain in the value of the assets belongs to the stoc%holders. The
bondholders will receive only the agreed upon interest. This is related to the concept
of leverage or trading on e$uity. By issuing debt the corporation gets to control a
large asset by using other people4s money instead of its own. *f the asset ends up
being very profitable all of its earnings minus the interest will enhance the owners4
financial position
!o the decision depends on the manager. Ee may issue common stoc% or issue bond
to the investor.
*nventory management&
*nventory management is primarily about specifying the size and placement of
stoc%ed goods. *nventory management is re$uired at different locations within a
facility or within multiple locations of a supply networ% to protect the regular and
planned course of production against the random disturbance of running out of
materials or goods. The scope of inventory management also concerns the fine lines
between replenishment lead time carrying costs of inventory asset management
inventory forecasting inventory valuation inventory visibility future inventory price
forecasting physical inventory available physical space for inventory $uality
management replenishment returns and defective goods and demand forecasting.
Balancing these competing re$uirements leads to optimal inventory levels which is
an on0going process as the business needs shift and react to the wider environment.
/conomic order Huantity&
/(H is the point where the carring cost and the storing cost will be minimum. /very
company wants to ma%e the order in a /(H point. *n this stage company can save
their cost.!o as a manager all the time should order at /(H point. *n this way
company could able to survive in the competition.
The aim of the /conomic (rder Huantity is to minimize Total *nventory 6ost. This
occurs where the total holding costs are e$ual to the costs of ordering. This is logical
because there is a trade0off between holding costs and ordering costs. *f you have no
inventory your ordering costs would be exponentialIyour suppliers would charge
for delivery each time bul% discounts would not be available and staff would be very
active in receiving regular orders. Eowever if you maintain too much inventory you
would incur significant holding costs. This is because the business might need more
staff e$uipment and storage space to handle high inventory levels.
*nventory control is important to ensure $uality control in businesses that handle
transactions revolving around consumer goods. #ithout proper inventory control a
large retail store may run out of stoc% on an important item. + good inventory control
system will alert the retailer when it is time to reorder. *nventory control is also an
important means of automatically trac%ing large shipments. For example if a business
orders ten pairs of soc%s for retail resale but only receives nine pairs this will be
obvious upon inspecting the contents of the pac%age and error is not li%ely. (n the
other hand say a wholesaler orders G99999 pairs of soc%s and G9999 are missing.
Manually counting each pair of soc%s is li%ely to result in error. +n automated
inventory control system helps to minimize the ris% of error. *n retail stores an
inventory control system also helps trac% theft of retail merchandise providing
valuable information about store profits and the need for theft0prevention systems.
+n in%entory contro system is a process for managing and locating objects or
materials. *n common usage the term may also refer to just the software components.
There are three *nventory 6ontrol !ystem.
G. 5ed Jine Method & +n inventory control procedure where a red line is drawn
around the inside of an inventory Bstoc%ed bin to indicate the reorder point
level.
K this procedure wor%s well for many items in retail businesses
8. 6omputerized *nventory 6ontrol !ystem
+ system of inventory control in which a computer is used to determine
reorder points , to adjust inventory balances.

L. Aust0 in BTime & + system of inventory control in which a manufacturer
coordinates production with suppliers so that raw materials of components
arrive just as they are needed in the production process.
#hich one is more suitable for the organization that depends on the nature of the
organization. !o manager use the system base on condition.
+ financia panner or persona financia panner is a practicing professional who
helps people deal with various personal financial issues through proper planning
which includes but is not limited to these major areas& cash flow management
education planning retirement planning investment planning ris% management and
insurance planning tax planning estate planning and business succession planning
-for business owners..
The wor% engaged in by this professional is commonly %nown as personal financial
planning. *n carrying out the planning function he is guided by the financial planning
process to create a financial planF a detailed strategy tailored to a client2s specific
situation for meeting a client2s specific goals. The %ey defining aspect of what the
financial planner does is that he considers all $uestions information and advice as it
impacts and is impacted by the entire financial and life situation of the client.
Financial 6ontrol is a %ey form of state control. Financial control focuses on monetary
values rather than physical units. *n capitalist countries financial control is a limited
bureaucratic process concerned primarily with the use of budgetary funds and the
financial activities of ministries departments and state0run enterprises and
institutions. )espite its appearance of strict legality financial control is an instrument
for protecting the interests of the bourgeoisie.
*n socialist countries financial control is the control by the state over public finances
in the production and distribution of the social product and national income. Financial
control is designed to improve the $uantitative and $ualitative performance indicators
of enterprises associations ministries and departments. The primary tas% of financial
control is to monitor the formation and use of centralized and decentralized monetary
resources. Financial control is used to facilitate the fulfillment of national economic
and financial plans preserve socialist property ensure that material labor financial
and natural resources are used rationally and efficiently and reduce losses and
nonproductive expenditures. *t also helps to reduce mismanagement and wastefulness
and to identify reserves for increasing the efficiency of social production. (ne of the
most important tas%s of financial control is to see that all legislation on financial
$uestions is carefully followed and that all financial commitments to the state budget
to ban%s and to other enterprises and organizations are promptly and fully met.
The "reake%en point in economics is the point at which cost or expenses and income
are e$ual 0 there is no net loss or gain one has Mbro%en evenM.
The point at which a firm or other economic entity brea%s even is e$ual to its fixed
costs divided by its contribution to profit per unit of output which can be shown by
the following formula& 0
Brea%even point in unitsNFixed cost?6ontribution margin per unit
Brea%even point in valuesNFixed costs?"?V ratio
#e all %now that the Brea%even "oint in a business is when it2s not ma%ing a profit or
losing money. !ounds simple rightO #ell can you tell me what your exact Brea%even
"oint isO "robably not. Most business owners either don2t %now it or thin% they %now
it with neither exactly %nowing. Brea%even can be expressed as a )ollar amount or
'nit !ales and once determined you have a Target to reach through a carefully
thought out Business "lan. #ithout an established Brea%even Target your !trategic
"lan is floundering.
*t is very important to understand that increased !ales do not always translate into
increased "rofits. Many companies have gone out of business by ignoring the
importance of Brea%even +nalysis thin%ing increased !ales will lead to certain
"rofitability. 'nfortunately more often than not the company2s Variable 6osts or
those directly derived from sales levels get exponentially larger as !ales Volume
1rows. @ot %nowing the Variable 6osts is a silent %iller for many companies.
#hen calculating the Brea%even "oint a person will have to ma%e certain
assumptions and estimates. /rror on the side of conservative numbers by using more
pessimistic sales and margin thresholds while overstating your projected costs. Pou
want the Brea%even "oint to be in the safe zone 0 a worst case threshold. * will present
some Brea%even formulas which err on the simple side you can get very complicated
with different Brea%even Formula variations. The point * am ma%ing here is providing
some simple formulas you can $uic%ly calculate your Brea%even and understand
where you are presently and what it loo%s li%e projected. (nce you have a handle on
that then maybe more sophisticated Brea%even +nalysis is warranted and
advantageous
Brea%even +nalysis is an excellent process to determine the effect of different unit
costs for expected sales for each unit type. 'nderstanding which your most profitable
units are and how they relate to Brea%even and "rofit 1oals is the heart of your
Mar%eting !trategy and !trategic and !ales "lan.
*n business terminology a high degree of operating leverage other things held
constant means that a relatively small change in sales will result in a large change in
operating income .!o it should be recommended that the lower the operating leverage
the more better result will come.
Financial leverage considers the impact changing operating income has on earnings
per share or earnings available to common stoc%holders.
(perating Jeverage affects the operating section of the income statement whereas
financial leverage affects the financing section of the income statement.
The three important concepts )(J )FJ and )TJ are very much important for any
business organizations in order to measure their performance.
From my point of view it is better for all of these three terms to become lower.
Because as lower the value the more these are better.
6onclusion &
+t last * want to say that we the students of regular MB+ course really learned lot of
valuable things in our intermediate financial management course. <nowledge of these
financial concepts will certainly bring benefits for our future professional life.