Decision That A Business Needs To Take When Doing Capital Budgeting

Getting capital budgeting for your business is an important decision that one needs to take. It involves lots of funds and the process is irreversible. Thus one should be careful and calculative when taking this decision.

The significance of doing capital budgeting

  • Capital budgeting is an important tool in the field of financial management
  • It helps the financial managers to evaluate the different projects and also the viability in taking on these huge investments
  • It helps to expose the owner to the risks and if there is any uncertainty in the different projects.
  • It helps to keep check if the expense is more or less than required
  • The management is given with an effective control on what the cost involved in the capital investment project is
  • The business fate is based on how the resources are utilized optimally

The decision of opting for capital budgeting

The main reasons why one needs to do capital budgeting is to maximize the profit. This can be done through two ways that are either by increasing the revenue or by reducing the cost. The increase in the revenue can be done by expanding the operations and this is done by adding a new product line. The method of reducing cost is to represent the obsolete return on the assets.

Accepting or rejecting a decision – If the proposal gets accepted then the business will invest in it. Alternatively, the proposal gets rejected then the firm stays away from that investment. The acceptance of a proposal is decided based on a rate of return that it yields. It should be greater than the required rate of return or the cost of capital. If it is lower, the proposal gets rejected. All the independent projects get accepted because the independent projects have no competition.

The projects that are mutually exclusive will compete with one another in a way such that the acceptance of one project will excel accepting the other project. Only one of the projects can be chosen. The mutually exclusive investment decision gain a lot of importance when one or more of the proposal gets accepted. When the best alternative is accepted then the other alternatives get eliminated.

In a case when the business has fewer funds then capital budgeting is straightforward. In this, the investment proposal that gives a return that is greater than some predetermined return gets accepted. But however, the actual business could have a different picture. The business could have some fixed capital budget and there could be many investment proposals that would be competing for the same. Capital rationing is when the firm has a number of acceptable investments that required greater finances than what is available in the firm. The investment is ranked based on the predetermined criteria which include the rate of return. The project that has a higher rate of return is given priority.

Factors Affecting Stock Prices

Many of us are share market enthusiasts. We keep investing in stocks every now and then and trade with them. We believe to go by our intuitive thoughts and also speculation skills. But at times we have to face certain risks and loss due to the same. This is how a share market treats its members with a lot of surprises. But we need to have the deeper understanding of the factors that cause such fluctuations in stock prices.

Some of the many are discussed here:

  1. Demand for the share:

When there is more supply than the demand for a share it will sell low. The demand for a share is determined by many factors which are related from the profits from it. When the expected return from a share is more than such type of a share will attract more investors.

  1. Bank interest rates:

Banks offer a low rate of interest on borrowing when there is a low bank rate by banking regulation. This helps customers to get a chance to borrow a larger sum of money and invest in securities. Thus the price of securities increases on such shares.

  1. Underwriting:

When a person guarantees the minimum purchase of shares of the company and this is not fulfilled he may have to purchase it completely. But to create a better demand these people called underwriters buy the shares through agents which will create an artificial demand for the shares thereby causing fluctuation in the prices.

  1. The buying behavior of institutional investors:

Some institutions which decide to invest in stocks have a different attitude towards a share and its buying decision. The people also thereby go by their decision and hence invest in similar shares.

  1. The financial position of the company:

The crucial factor to judge a company’s share is the financial position. This justifies the payment of dividend to shareholders when the financial status is good. Therefore people prefer the companies which are financially well off.

  1. Appointing and the resignation of people in a company:

When the top-level management change or are newly appointed, fear and doubt are created in the minds of people which are risky and changes the share price accordingly.

  1. Listing of the shares in more than one market:

This affects the share prices as the changes in one market will affect the prices in another market simultaneously.there too many listings can be risky and dangerous.

  1. Political changes:

Share market is very sensitive to political change and hence during war outbursts and other political instability issues, the price of shares varies to a large extent.

These areas few of the reasons why the share market prices fluctuate.

 

Advantages and Disadvantages of Hedging in Finance

Most of the companies use hedges to reduce the risk level in their most important areas of operation, which is very beneficial for the companies during very volatile market conditions which would otherwise be detrimental to the profits of the company. While making huge investments considering the hedge investment is favorable as it is more or less like an insurance policy to protect against the market risk of fluctuating conditions and protecting the investor form steep losses.

Why Hedging is considered

Since companies have exposure to markets suiting their area of operation, securing the cost of any cost fluctuations help in managing the production cost to be in control. For example, Airline industries have huge requirement for fuel which is often hedge to keep them unaffected by the pricing variations in energy-related costs.

Similarly, hedging can be resorted to locking in the price of commodities to be used future for fixing their production costs, in case the price goes down it protects them from the pricing decline, and in case of rising values, it is often set off by commodity price declines. If companies stayed away from the hedge it, had a tough time to accommodate the rising costs to keep them in operation.

Advantages

  • risk on the investment is considerably reduced very significantly
  • losses can be offset if they use hedging as an advantage for the cost which is highly volatile in the manufacturing and financial sectors
  • investment in the forex currency markets are definitely fluctuating which is saved by hedging in the international to a great extent
  • the positive or negative growth is forgone for a currency during the hedging due to the currency’s strength or weakness
  • higher returns, low relation with the correlated investment products
  • using time-tested strategies may not work and innovative techniques could be used in favor of the investors
  • easy liquidation process makes the investment in hedge funds to be simpler

Disadvantages

  • investing all the capital amount in hedging of a particular product may not be the best idea as funds have to be diversified in different funds,
  • redemption of funds invested in hedging could be difficult as they may stipulate a particular date and time for redemption and with a frequency which could be after 3 months
  • the cost of hedge funds is high, no so is the fees associated with it, which is two way, one is as good as administration fees charged while investing in Mutual funds, the other being according to their performance a percentage of profits is charged.

 

 

 

 

CSR – An Access To Finance

Many of us are of the thought that CSR is for the good benefits of the society better. But do they benefit the companies or the organizations that follow this? Of course, it is a beneficial thing for the companies too who strive to follow these concepts. CSR is basically about how the company takes into account the social welfare of the society too in their process of designing and production of services. There have been a lot of research and analysis that shows how CSR has benefitted the companies in allocating extra funds for their new projects. Now you might be thinking as to how this is related to following the concepts of CSR.

CSR- higher allocations

Now when there is a company following the concepts of CSR, it would be able to produce products and services that are safe and sound for not only the customers but also the nature because generally CSR talks and elaborates on social responsibilities and awareness and pays attention to how nature too needs to be preserved in its greenery and not spoilt for the reason of some new products and services. So when this is followed meticulously, the services of this company are rated higher than the others in the market which attracts more customers and this way the company gets to earn more. So when there is an increase in the profits of a company, it gets to allocate more for CSR initiatives. And not only this but also funds for more new projects.

SME`s and CSR

CSR is a concept followed by all the companies irrespective of their size and business type. But when compared to the big businesses, it is a little difficult for the small and the medium industries and companies to follow this especially when they are in the initial few days of their incorporation because their major goals and concentration would be on core business and survival in the market amidst heavy competition. This is something very important for all the companies because for them the first thing is an established position in the market and once this is achieved, it would become easy for the company to implement and appoint CSR concepts easily in all its business operations.

So in any which way at any stage of a businesses’ growth and development stage, it would be important for the company to follow CSR for this is a must and a mandatory one for all.

Investments – A Gambling Game

Investments in stocks and shares are like a gambling game which is fun playing. This is a market that has been through all types of market situations. There have been some really good times and have also seen some declines sweeping off everything from the stock market and the stockholders. So is there a need for a new approach to investing in stocks? Do the investors have to look for something new in this market? If so what are the promises or affirmations that these options or new experiments would be a success?

New rules in investments in stocks

Here are some new rules that would make the investments in stocks a better and an enhanced one and these are like guidelines that would make it easy for the investors to understand the market slow and steady and then make choices between the various options before making their expenditure in this market.

  • It is not necessary that all the shares and stocks that are bought need to be sold immediately for they can be held for a certain period of time. is it because they would present a very lavish opportunity? This is not a sure happening here for there are all possibilities for their prices to either go up high or fall down badly. But when you decide to hold them for a period of time, you will always have the opportunity, the time to understand and study the market. So when there is an opportunity for these shares to be sold at a really good price the shareholder would be placed better than the other shareholders and it would add value and worth to his wait.
  • Assess the market well especially when it is recouping from a fall. Now at this time, it is important that you think about what you did with the stocks, whether you bought them, sold them or were holding them; inspect the damage or the hit the market has taken and the portion of it that you have taken; examine the risks that you would be able to take the hit for the period after this would be a dawning period, in fact, a new beginning like and hence you will be able to make the best of it.
  • Now, this is a period that would present a lot of new options for diversification. Try to make the maximum use of this and make the diversification vast so that the loss from one gets easily set off from the profits made from the other option. This diversification would also open you up to many different choices present in the market.

Important Aspects Of Financial Modelling

If you have a fresh business concept or an already established company, at any point in time it is quintessential to have a precise financial model for the complete operation of the business. The process of creating and maintaining a reliable financial model represents the past, present and future aspects of the company and is based on specific mathematical models or calculations, done with the help of statistical tools.

Constructing a financial model is important for the following purposes:

  • Construct or reconstruct financial decisions, cash flows and revenues.
  • Expansion or take-over of a current business, which is primarily in business valuation
  • Starting a new venture
  • Attracting investments
  • Decide the market direction of its products or strategic planning for finding new arenas
  • Calculate the cost of capital for new projects
  • Capital budgeting and resource diversions
  • Market comparisons and performance chart organizing
  • Annual financial reports and statements

A financial model may be created for the entire performance parameters of the business or for a particular event. The primary task of an analyzer who is assigned the task of creating a financial model is to collect all the variables representing the company figures. These figures are then placed in a preset position based on theories and suitable model is structured around them. Specific mathematical formulae are derived from these variables and the event or performance is portrayed through spreadsheet language.

Variable section for constructing a Financial Model

The accuracy of a model depends on the selection of proper variables used for construction. A skilled analyzer will be able to selectively pick out only the relevant ones, and this depends usually on the objective of model creation. Variables significant for reconstruction is different from the ones required for forecasting. Each of the variables picked out should be powerful enough to have an impact on the model during its testing and use.

The sensitivity of the models to these variables can appear in two ways when an input is given to the built model:

  1. Any kind of change in even a single variable can influence the final outcome or result of the model.
  2. A change in one variable can cause an alteration in one more of the other variables used in the model.

A simple example can be used for illustration. You want to forecast the revenue growth of a company and the model used for this is the 3-statement model. To construct this model, you need three variables: balance sheet, statements of income and cash flow and the schedules for supporting the data. If there is a change in the income, the revenue created by the model will be altered and so will the cash flow. An ideal model should be presented in a simple format and give the desired assumptions to the user.