Assignment on the

“Things that we learned from this

course and way of explore these in
business organizations”

Course No: FIN 503

Course Title: Intermediate Financial Management
Section: 1, Fall-2010

Prepared For
Dr. Tanbir Ahmed Chowdhury
Course Instructor

Prepared By
Md. Raihanul Aktar
( ID# 2009-1-95-056 )

Date of Submission: 13 December, 2010

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 Share Price and corporate social
responsibility.
We also learned that the conflict that frequently happens
between managers and owners are generally known as agency
problem.
So, in order to minimize this agency problem usually the
following procedures are taken. These are :

(1) Market Forces :

Under this approach firstly we need to elect the Board Of
Directors and then give them the empowerment to hire or fire. In
addition they also have the power to expel under performing
management as well as providing threat of hostile takeover to
the management to perform in the best interest of the
shareholders otherwise the owner may think about the
possibility of a hostile takeover.

(2)Agency Costs :

A conflict of interest arising between creditors, shareholders and

management because of differing goals. It is defined by the costs
borne by stockholders to prevent or minimize agency problem.
For example, an agency problem exists when management and
stockholders have conflicting ideas on how the company should
be run. Through the following four types we can perform the
functions of Agency 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

consequences 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) Opportunity costs: Actually 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 quickly.

(iv) The most popular, powerful, & expensive agency costs

incurred by firms are Structuring Expenses. It includes
providing managerial compensation and incentive plans that
tend to tie management compensation to share price. The most
popular incentive plan is the yielding stock of options to
administration.

(a) A stock option enables employees to purchase shares of a

given class in consideration for a pre-determined amount
referred to as the exercise price. The employees profit from a
rise in the price of the shares, since the exercise price is pre-
determined, but they have not yet paid for the shares. Obviously,
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. Giving way of Stock
options to management permit managers to purchase stock at
the market price set at the time of the grant. They will be
pleased by being able to resell the shares subsequently at the
higher market price if the market price rises.

On the other hand, there are also problems in granting stock

options to employees. For instance, a decline in the value of the
options due to daily market fluctuations may lower the
employees' motivation. In addition, the decision of who will be
compensated may cause problems with non-compensated
employees (including good middle management). In 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. In
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 masked in a poor stock market in which
share prices general have declined due to economic and
`behavioral market forces outside of management’s control.

(b) Performance plans: This type of approach includes the use of

routine plan has mature in popularity in recent years due to their
relative independence from market forces. A 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 person’s 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 feedback. During the meeting, the
employee is evaluated with respect to success in achieving last
year’s goals, and new goals are set for the next performance
appraisal period.
Even though performance appraisals can be quite 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. In many
companies, a performance appraisal takes 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 quality movement, Edward Deming, 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. In addition another form of performance based
compensation is cash bonuses where cash payments united to
the accomplishment of certain performance goals.

So, by following the above mentioned way we can easily

minimize our corporation’s agency problem.

Responsibility of finance manager:

Almost 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. As computers are increasingly used
to record and organize data, many financial managers are
spending more time developing strategies and implementing the
long-term 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 risk and insurance manager.
Controllers direct the preparation of financial reports that
summarize and forecast the organization's financial position,
such as income statements, balance sheets, and analyses of
future earnings or expenses. Controllers also are in charge of
preparing special reports required by regulatory authorities.
Often, controllers oversee the accounting, audit, and budget
departments. Treasurers and finance officers direct the
organization's financial goals, objectives, and budgets. They
oversee the investment of funds and manage associated risks,
supervise cash management activities, execute capital-raising
strategies to support a firm's expansion, and deal with mergers
and acquisitions. Credit managers oversee the firm's issuance of
credit. They establish credit-rating criteria, determine credit
ceilings, and monitor the collections of past-due accounts.
Managers specializing in international finance develop financial
and accounting systems for the banking transactions of
multinational organizations.

Cash 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
requirements or whether surplus cash should be invested in
interest-bearing instruments. Risk and insurance managers
oversee programs to minimize risks and losses that might arise
from financial transactions and business operations undertaken
by the institution. They also manage the organization's insurance
budget.

Financial institutions, such as commercial banks, 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 required to
solicit business, authorize loans, and direct the investment of
funds, always adhering to Federal and State 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 work for financial institutions must keep abreast
of the rapidly growing array of financial services and products.

In addition to the general duties described above, all financial

managers perform tasks unique 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 knowledgeable
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 require extensive, specialized knowledge
on the part of the financial manager to reduce risks and
maximize profit. Financial managers increasingly are hired on a
temporary basis to advise senior managers on these and other
matters. In 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 takes 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 work on teams, acting as business
advisors to top management. Financial managers need to keep
abreast of the latest computer technology in order to increase the
efficiency of their firm's financial operations

In the second chapter we have learned about the capital

structure.
Capital structure is the ratio of using equity and debt in the
organization. When a company use more debt in Capital
structure then the risk will be higher.

The Board of Directors or the financial manager of a company

should always endeavor to develop a capital structure that would
lie beneficial to the equity shareholders in particular and to the
other groups such as employees, customers, creditors, society in
general. While developing an appropriate capital structure for its
company the financial manager should aim at maximizing the
long-term market price per share. This can be done only when
all these factors which are relevant to the company’s capital
structure decisions are properly analyzed and balanced.

In finance, capital structure refers to the way a corporation

finances its assets through some combination of equity, debt, or
hybrid securities. A firm's capital structure is then the
composition or 'structure' of its liabilities. For example, a firm
that sells $20 billion in equity and $80 billion in debt is said to
be 20% equity-financed and 80% debt-financed. The firm's ratio
of debt to total financing, 80% in this example, is referred to as
the firm's leverage. In reality, capital structure may be highly
complex and include dozens of sources. Gearing Ratio is the
proportion of the capital employed of the firm which come from
outside of the business finance, e.g. by taking a short term loan
etc.

Capital structure suitable for the new firm :

In case newly introduced firm , it is always recommended that
the firm should finance its fund from only equity capital.
Contrary to widely held beliefs that startup companies rely
heavily on funding from family and friends, a Kauffman
Foundation research paper released today reported that external
debt financing such as bank loans are the more common sources
of funding for many companies during their first year of
operation. According to the study, nearly 75 percent of most
firms' startup capital is made up in equal parts of owner equity
and bank loans and/or credit card debt, underscoring the
importance of liquid credit markets to the formation and success
of new firms.

Capital structure suitable for the growing firm :

In case growing firm , it is always recommended that the firm
should finance its fund from both equity capital and debt capital
keeping in mind that the portion of debt capital obviously less
than maturing firm. Situation will determine about how much
debt and equity capital are required to finance for that type of
firm.

Capital structure suitable for the mature firm :

In case of mature firm , it is always recommended that the firm
should finance its fund from both equity capital and debt capital.
In that case, the portion of debt capital is the highest than that
of growing and newly introduced firm.
In general we should remember that optimum capital structure
(where weighted average cost of capital is the lowest) is always
suitable for firm.
If the firm’s business risk is higher, and at the same time
financial risk is lower it is suggested that the firm should use
more equity capital and small portion of debt capital. On the
other hand if the firm’s business risk is lower, and at the same
time financial risk is higher it is recommended that the firm
should use more debt capital and small portion of equity capital.
For example in case of Petro-Bangla, business risk is higher, and
at the same time financial risk is lower. So it is suggested that
the firm should use more equity capital and small portion of
debt capital. Again if we consider in case of TNT, here we see
that the firm’s business risk is lower, and at the same time
financial risk is higher. That’ it is recommended that the firm
should use more debt capital and small portion of equity capital.
Similarly if the firm’s tax position is higher the firm is more
likely suitable to use more debt since interest on debt is tax
deductable item. On the other hand if the firm is low tax bracket,
the firm need to use low debt capital in order to minimize the
risk.
Apart from this financial flexibility is another factor that also
affect the capital structure decisions.Where interest rate is
higher like developing countries(for example Bangladesh) it is
said that there is less financial flexibililty exists in that
countries. It happens because of higher demand in compare to
the lower supply. On the contrary, where is less interest rate like
developed countries(for example Japan) it is said that there is
more or high financial flexibility exists in that countries. It is
just as a result of lower demand in comparison to the total
supply. In addition managerial attitude is another one of the
important factors that determine capital structure decisions. If
the managers are aggressive in nature they are more likely to
take debt capital. But if the managers are conservative in nature
they are less likely to finance their firm’s capital from debt
capital.

The various factors affecting the capital structure decision are

Management Attitudes: Management’s attitude concerning

control of enterprise and risk, involved determine the debt or
equity in the capital structure and any analysis of capital
structure planning can hardly afford to ignore this factor. In fact
every addition of equity 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 flow ability of the company: When 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 short-term
maturity. It 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.
Obviously, the greater and more stable the expected future cash
flows of the firm, the greater the debt capacity and vice-versa.
To be on a safe side the cash flow ability must be determined in
the period of depression very carefully.

Assets Structure: Composition and liquidity 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 – use long-term debt
extensively similarly greater the liquidity the more debt that
generally can be used all other factors remaining constant. The
less liquid the assets of firm the less flexible the firm can be in
meeting its fixed charged obligations

Leverage or Trading on equity: Trading on equity or leverage

refers to the financial process. This enables the owners of a
company to enhance their return on equity by borrowing funds
for one rate of interest, and using the money to earn a higher rate
of return, keeping the different for themselves. It is thus, called
making money by using other people’s money. Some 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. Debts and pre share capital results’ into
magnifying the earnings per share (EPS) prevailed the firm
earns more on the assets purchased with these funds than the
cost of their use. Earnings before interest and taxes (EBIT) and
EPS relationship are the means to examine the effect of
leverage. Out of per share capital and debt,’ 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 risk of the company and,
therefore, it should not be used beyond a point where the
amount of fixed commitment charges equals the level of EBIT.
To give, up because of its effect on EPS financial leverage is
one the important consideration in planning the capital structure
for the company.

Then we learned the topic on “Working capital”.

Working capital is that part of company’s capital which is used

for purchasing raw material and involve in sundry debtors. We
all know that current assets are very important for proper
working of fixed assets. Suppose, 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 working capital is very useful
for operating any business organization. We can also take one
more liquid item of current assets that is cash. If you have not
cash in hand, then you can not pay for different expenses of
company, and at that time, your many business works may delay
for not paying certain expenses. If we define working capital in
very simple form, then we can say that working capital is the
excess of current assets over current liabilities. Working Capital
is the money used to make goods and attract sales. The less
Working Capital used to attract sales, the higher is likely to be
the return on investment. Working Capital management is about
the commercial and financial aspects of Inventory, credit,
purchasing, marketing, and royalty and investment policy. The
higher the profit margin, the lower is likely to be the level of
Working Capital tied up in creating and selling titles. The faster
that we create and sell the books the higher is likely to be the
return on investment. Thus when we have been using the word
investment in the chapter on pricing, we have been discussing
Working Capital.

After that we had learned the concept on “Current Assets

investment policy”.
Optimal investment in current asset is part of the working
capital management policy within an organization. An effective
working capital management requires right amount of
investment in current assets and appropriate level of short-term
financing. Excessive investment in current assets means lack of
funds to invest elsewhere which shall effect the liquidity 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 equilibrium or optimal

level of investment in current asset and a right mix of financing
(either short-term or long-term) to support the investment.
Company's decision of selecting a short-term investment
policy must be based upon maximizing the firm value in the
long run while keeping a balance between the profitability and
liquidity goals of the company.

Growth companies should focus on keeping stock of inventory

to service the predicted growth in demand as well as to compete
with the local wholesalers. Although the investment in asset will
not provide better return as compared to long-term investment
options, however, the opportunity cost of a sale foregone due to
unavailability of stock can keep the company out of business
forever. Hence finding the right level of investment requires a
trade-off between minimizing cost without hindering the
liquidity of business.

Company might select an aggressive short-term financing

policy whereby it will fund both its temporary and permanent
current assets with the help of short-term finance, if the demand
of goods fluctuate and access of short-term finance is readily
available. Manager's prediction about the movement in short-
term interest rate as compared to long-term interest rate will also
affect the decision.

However, if a company short-term 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 long-term finance. By taking this approach, company
can lock in the cost of funds and avoid any short-term interest
rate fluctuations.

On one hand, companies carrying cost components such as;

interest expenses, insurance & taxes, material handling
expenses, damage and obsolescence cost will increase with the
increase in inventory investment. On the other hand, its shortage
cost components such as; stock out cost, lost contribution due to
shortage of supply and customer goodwill foregone will
decrease with the increase in investment in inventory you hold.

After that we had studied the most important concept and that is
nothing but Cash management.

Cash management consists of taking the necessary actions to

maintain adequate levels of cash to meet operational and capital
requirements and to obtain the maximum yield on short-term
investments of pooled, idle cash. A good cash management
program is a very significant component of the overall financial
management of a municipality. Such a program benefits the city
or town by increasing non-tax 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 municipality’s
funds.

Businesses must understand cash management for it to be

effective. Financial goals will be harder to achieve without a
proven structure. It is possible that goals are not achieved, and it
can be seen that cash management may have taken part in it one
way or another. It's the fundamental building block 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. Some of
the points that will be brought up are managing your working
capital, managing business risks, and monitoring costs.
Working capital is an essential part of cash management. The
level of working capital of a business is directly related to the
flow of cash into and out of a business. Working capital is
needed to setup a business, pay operating costs, and continue to
operate until the receivables arrive. Depending on the amount of
working capital the business uses, things

Cash can be effected like paying suppliers, buying materials and

even salaries. I can be seen that maintaining and managing a
particular level of working capital allows the business to flex
during hard times. Not understanding and forecasting the need
for the correct amount of working capital can be devastating to a
business.
Short-term financing can be used to make business purchases
that can allow the company to purchase fixed assets, or help a
company with less than expected working capital. A line of
credit can be created with the company's financial institution,
and is normally done before the need should arise to be
effective. There are many risks involved in running a business,
and serious challenges should be expected at some time in the
future. It is possible to reduce the risk of possible capital issues
by planning ahead and having a more diversified client base.
Having the business depend on the heath of another business is
not good practice.

Finally manager should take all the step to receive the money
quickly and delay in the case of disbursement.

We had also gathered knowledge on the most important concept

Common Stock that are frequently used in the field of finance.

Common Stock is a security representing a legal claim to a

percentage of a company's earnings and assets. Holders of
common Stock have some input into choosing company
management, but do not generally have much say in the day to
day operations. If the common stock is publicly traded, the
company will generally be required to meet regulatory
obligations such as filing audited financial reports. Holders of
common stock are also offered the chance to participate in an
annual meeting, where the company may share its vision for the
future. Investors may purchase common stock if they believe a
company will be worth more in the future than it is valued at in
the present. Common stock does not always pay a dividend. If
the company goes bankrupt common stockholders generally
lose their entire investment.

The advantages of issuing common stock are Given below:

• Common stock has the potential for delivering very large

gains, Annual returns-on-investment (ROIs) of over 100%
have occurred on a somewhat regular basis.
• The potential loss from stock 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.
• Stocks offer limited legal liability. Passive stockholders
are protected against any liability stemming from the
company’s actions beyond their financial investment in the
company.
• Most stocks are very liquid; in other words, they can be
bought and sold quickly at a fair price.
• Although past performance is not a guarantee of future
performance, stocks have historically offered very high
returns in relation to other investments.
• Stocks offer two ways for their owners to benefit, by
capital gain and with dividends. As previously stated, each
share of stock represents partial ownership in a company. If
the company becomes more valuable, so will the ownership
interest
represented by each share of stock. This appreciation of the
stock’s value is known as a capital gain.

Sometime manager take the decision to issue bond in the market

for financing. When a company issue bond instead of common
stock get some extra benefits.

There are several advantages of issuing bonds or other debt

instead of stock when acquiring assets. One advantage is that the
interest on bonds and other debt is deductible on the
corporation’s income tax return. Dividends on stock are not
deductible on the income tax return.
A second advantage of financing asset with bonds instead of
stock 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 stockholders.
The bondholders will receive only the agreed upon interest.
This is related to the concept of leverage or trading on equity.
By issuing debt, the corporation gets to control a large asset by
using other people’s money instead of its own. If the asset ends
up being very profitable, all of its earnings minus the interest,
will enhance the owners’ financial position

So the decision depends on the manager. He may issue common

stock or issue bond to the investor.
Inventory management:

Inventory management is primarily about specifying the size

and placement of stocked goods. Inventory management is
required at different locations within a facility or within multiple
locations of a supply network 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, quality management,
replenishment, returns and defective goods and demand
forecasting. Balancing these competing requirements leads to
optimal inventory levels, which is an on-going process as the
business needs shift and react to the wider environment.

Economic order Quantity:

EOQ is the point where the carring cost and the storing cost will
be minimum. Every company wants to make the order in a EOQ
point. In this stage company can save their cost.So as a manager
all the time should order at EOQ point. In this way company
could able to survive in the competition.

The aim of the Economic Order Quantity is to minimize Total

Inventory Cost. This occurs where the total holding costs are
equal to the costs of ordering. This is logical because there is a
trade-off between holding costs and ordering costs. If you have
no inventory, your ordering costs would be exponential—your
suppliers would charge for delivery each time, bulk discounts
would not be available and staff would be very active in
receiving regular orders. However, if you maintain too much
inventory you would incur significant holding costs. This is
because the business might need more staff, equipment and
storage space to handle high inventory levels.

Inventory control is important to ensure quality control in

businesses that handle transactions revolving around consumer
goods. Without proper inventory control, a large retail store may
run out of stock on an important item. A good inventory control
system will alert the retailer when it is time to reorder. Inventory
control is also an important means of automatically tracking
large shipments. For example, if a business orders ten pairs of
socks for retail resale, but only receives nine pairs, this will be
obvious upon inspecting the contents of the package, and error
is not likely. On the other hand, say a wholesaler orders 100,000
pairs of socks and 10,000 are missing. Manually counting each
pair of socks is likely to result in error. An automated inventory
control system helps to minimize the risk of error. In retail
stores, an inventory control system also helps track theft of retail
merchandise, providing valuable information about store profits
and the need for theft-prevention systems.

An inventory control system is a process for managing and

locating objects or materials. In common usage, the term may
also refer to just the software components. There are three
Inventory Control System.

1. Red Line Method : An inventory control procedure where

a red line is drawn around the inside of an inventory –
stocked bin to indicate the reorder point level.
· this procedure works well for many items in retail
businesses
2. Computerized Inventory Control System
A system of inventory control in which a computer is used
to determine reorder points & to adjust inventory balances.

3. Just- in –Time : A 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.

Which one is more suitable for the organization that depends on

the nature of the organization. So manager use the system base
on condition.

A financial planner or personal financial planner 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, risk management and insurance planning,
tax planning, estate planning and business succession planning
(for business owners).

The work engaged in by this professional is commonly known

as personal financial planning. In carrying out the planning
function, he is guided by the financial planning process to
create a financial plan; a detailed strategy tailored to a client's
specific situation, for meeting a client's specific goals. The key
defining aspect of what the financial planner does is that he
considers all questions, information and advice as it impacts and
is impacted by the entire financial and life situation of the client.

Financial Control is a key form of state control. Financial

control focuses on monetary values rather than physical units. In
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 state-run
enterprises and institutions. Despite its appearance of strict
legality, financial control is an instrument for protecting the
interests of the bourgeoisie.

In 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 quantitative and qualitative
performance indicators of enterprises, associations, ministries,
and departments. The primary task 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. It also helps to reduce
mismanagement and wastefulness and to identify reserves for
increasing the efficiency of social production. One of the most
important tasks of financial control is to see that all legislation
on financial questions is carefully followed and that all financial
commitments to the state budget, to banks, and to other
enterprises and organizations are promptly and fully met.

The breakeven point in economics is the point at which cost or

expenses and income are equal - there is no net loss or gain, one
has "broken even".

The point at which a firm or other economic entity breaks even

is equal to its fixed costs divided by its contribution to profit per
unit of output, which can be shown by the following formula: -

Breakeven point in units=Fixed cost/Contribution margin per

unit

Breakeven point in values=Fixed costs/P/V ratio

We all know that the Breakeven Point in a business is when it's

not making a profit or losing money. Sounds simple, right?
Well, can you tell me what your exact Breakeven Point is?
Probably not. Most business owners either don't know it or think
they know it, with neither exactly knowing. Breakeven can be
expressed as a Dollar amount or Unit Sales, and once
determined, you have a Target to reach through a carefully
thought out Business Plan. Without an established Breakeven
Target, your Strategic Plan is floundering.

It is very important to understand that increased Sales do not

always translate into increased Profits. Many companies have
gone out of business by ignoring the importance of Breakeven
Analysis, thinking increased Sales will lead to certain
Profitability. Unfortunately, more often than not, the company's
Variable Costs, or those directly derived from sales levels, get
exponentially larger as Sales Volume Grows. Not knowing the
Variable Costs is a silent killer for many companies.

When calculating the Breakeven Point, a person will have to

make certain assumptions and estimates. Error on the side of
conservative numbers by using more pessimistic sales and
margin thresholds, while overstating your projected costs. You
want the Breakeven Point to be in the safe zone - a worst case
threshold. I will present some Breakeven formulas which err on
the simple side, you can get very complicated with different
Breakeven Formula variations. The point I am making here is
providing some simple formulas you can quickly calculate your
Breakeven and understand where you are presently and what it
looks like projected. Once you have a handle on that, then
maybe more sophisticated Breakeven Analysis is warranted and
advantageous

Breakeven Analysis is an excellent process to determine the

effect of different unit costs for expected sales for each unit
type. Understanding which your most profitable units are, and
how they relate to Breakeven and Profit Goals is the heart of
your Marketing Strategy and Strategic and Sales Plan.

In 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 .So 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 stockholders.

Operating Leverage affects the operating section of the income

statement , whereas financial leverage affects the financing
section of the income statement.

The three important concepts DOL, DFL and DTL 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.

Conclusion :

At last I want to say that we the students of regular MBA course

really learned lot of valuable things in our intermediate financial
management course. Knowledge of these financial concepts will
certainly bring benefits for our future professional life.