Long term n short term finance

financing is a very important part of every business. Firms often

need financing to pay for their assets, equipment, and other important
items. Financing can be either long-term or short-term. As is obvious,
long-term financing is more expensive as compared to short-term
financing.
There are different vehicles through which long-term and short-term
financing is made available. This chapter deals with the major vehicles of
both types of financing.
The common sources of financing are capital that is generated by the
firm itself and sometimes, it is capital from external funders, which is
usually obtained after issuance of new debt and equity.
A firms management is responsible for matching the long-term or shortterm financing mix. This mix is applicable to the assets that are to be
financed as closely as possible, regarding timing and cash flows.
Long-Term Financing
Long-term financing is usually needed for acquiring new equipment,
R&D, cash flow enhancement, and company expansion. Some of the
major methods for long-term financing are discussed below.
Equity Financing
Equity financing includes preferred stocks and common stocks. This
method is less risky in respect to cash flow commitments. However,
equity financing often results in dissolution of share ownership and it also
decreases earnings.
The cost associated with equity is generally higher than the cost
associated with debt, which is again a deductible expense. Therefore,
equity financing can also result in an enhanced hurdle rate that may
cancel any reduction in the cash flow risk.
Corporate Bond

A corporate bond is a special kind of bond issued by any corporation to

collect money effectively in an aim to expand its business. This tern is
usually used for long-term debt instruments that generally have a
maturity date after one year after their issue date at the minimum.
Some corporate bonds may have an associated call option that permits
the issuer to redeem it before it reaches the maturity. All other types of
bonds that are known as convertible bonds that offer investors the
option to convert the bond to equity.
Capital Notes
Capital notes are a type of convertible security that are exercisable into
shares. They are one type of equity vehicle. Capital notes resemble
warrants, except the fact that they usually dont have the expiry date or
an exercise price. That is why the entire consideration the company aims
to receive, for the future issuance of the shares, is generally paid at the
time of issuance of capital notes.
Many times, capital notes are issued with a debt-for-equity swap
restructuring. Instead of offering the shares (that replace debt) in the
present, the company provides its creditors with convertible securities
the capital notes and hence the dilution occurs later.
Short-Term Financing
Short-term financing with a time duration of up to one year is used to
help corporations increase inventory orders, payrolls, and daily supplies.
Short-term financing can be done using the following financial
instruments
Commercial Paper
Commercial Paper is an unsecured promissory note with a pre-noted
maturity time of 1 to 364 days in the global money market. Originally, it
is issued by large corporations to raise money to meet the short-term
debt obligations.
It is backed by the bank that issues it or by the corporation that
promises to pay the face value on maturity. Firms with excellent credit
ratings can sell their commercial papers at a good price.

Asset-backed commercial paper (ABCP) is collateralized by other

financial assets. ABCP is a very short-term instrument with 1 and 180
days maturity from issuance. ACBCP is typically issued by a bank or
other financial institution.
Promissory Note
It is a negotiable instrument where the maker or issuer makes an issueless promise in writing to pay back a pre-decided sum of money to the
payee at a fixed maturity date or on demand of the payee, under specific
terms.
Asset-based Loan
It is a type of loan, which is often short term, and is secured by a
company's assets. Real estate, accounts receivable (A/R), inventory and
equipment are the most common assets used to back the loan. The given
loan is either backed by a single category of assets or by a combination
of assets.
Repurchase Agreements
Repurchase agreements are extremely short-term loans. They usually
have a maturity of less than two weeks and most frequently they have a
maturity of just one day! Repurchase agreements are arranged by selling
securities with an agreement to purchase them back at a fixed cost on a
given date.
Letter of Credit
A financial institution or a similar party issues this document to a seller of
goods or services. The seller provides that the issuer will definitely pay
the seller for goods or services delivered to a third-party buyer.
The issuer then seeks reimbursement to be met by the buyer or by the
buyer's bank. The document is in fact a guarantee offered to the seller
that it will be paid on time by the issuer of the letter of credit, even if the
buyer fails to pay.
Working capital management is associated with receiving and paying out
cash. As is obvious, the companies tend to maximize the benefits of
earning by paying as late as possible and getting paid as soon as possible.

Zero Based Budgeting Meaning and Definition: Zero-based budgeting

in management accounting involves preparing the budget from the scratch
with a zero-base. It involves re-evaluating every line item of cash flow statement and
justifying all the expenditure that is to be incurred by the department.
Thus, zero-based budgeting definition goes as a method of budgeting whereby all
the expenses for the new period are calculated on the basis of actual expenses that
are to be incurred and not on the incremental basis which involves just increasing the
expenses incurred in the previous year at some fixed rate. Under this method, every
activity needs to be justified, explaining the revenue that every cost will generate for
the company.
Contrary to the traditional method of budgeting in which past trends or past
sales/expenditure are expected to continue, zero-based budgeting assumes that
there are no balances to be carried forward or there are no expenses that are precommitted. In the literal sense, it is a method for building the budget with zero prior
bases. Zero-based budgeting lays emphasis on identifying a task and then funding
these expenses irrespective of the current expenditure structure.
Zero Based Budgeting Steps
1. Identification of a task
2. Finding ways and means of accomplishing the task
3. Evaluating these solutions and also evaluating
of sources of funds
4. Setting the budgeted numbers and priorities

alternatives

An example of zero-based budgeting is given below to understand how it works.

Zero Based Budgeting Example
Let us take an example of a manufacturing department of a company ABC that spent
$ 10 million last year. The problem is to budget the expenditure for the current year.
There are multiple ways of doing so:
1. The board of directors of the company decides to increase/decrease
the expenditure of the department by 10 percent. So the
manufacturing department of ABC Ltd will get $ 11 million or $ 9
million depending on the managements decision.
2. The senior management of the company may decide to give the
department the same amount as it got in the previous year without

hiring more people in the department, or increasing the production

etc. This way, the department ends up getting $ 10 million.
3. Another way is, as, against the traditional method, management
may use zero-based budgeting in which the previous years number
of $ 10 million is not used for calculation. Zero-based budgeting
application involves calculating all the expenses of the department
and justifying each of these. This reflects the actual requirement of
the manufacturing department of company ABC which may be $
10.6 million.
Having understood zero-based budgeting calculation; some of the advantages of
zero-based budgeting are stated below:

Zero Based Budgeting Advantages:

1. Accuracy: Against the regular methods of budgeting that involve
just making some arbitrary changes to the previous years budget,
zero-based budgeting makes every department relook each and
every item of the cash flow and compute their operation costs. This
to some extent helps in cost reduction as it gives a clear picture of
costs against the desired performance.
2. Efficiency: This helps in efficient allocation of resources
(department-wise) as it does not look at the historical numbers but
looks at the actual numbers
3. Reduction in redundant activities: It leads to the identification of
opportunities and more cost-effective ways of doing things by
removing all the unproductive or redundant activities.
4. Budget inflation: Since every line item is to be justified, zerobased budget overcomes the weakness of incremental budgeting of
budget inflation.
5. Coordination and Communication: It also improves co-ordination
and communication within the department and motivates
employees by involving them in decision-making.
Although zero-based budgeting merits make it look like a lucrative method, it is
important to know the disadvantages listed as under:

Zero Based Budgeting Disadvantages:

1. Time-Consuming: Zero-based budgeting is a very time-intensive
exercise for a company or a government funded entries to do every
year as against incremental budgeting, which is a far easier method.
2. High Manpower Requirement:Making an entire budget from the
scratch may require the involvement of a large number of

employees. Many departments may not have an adequate time and

human resource for the same.
3. Lack of Expertise: Explaining every line item and every cost is a
difficult task and requires training the managers.
Conclusion: Zero-based budgeting aims at reflecting true expenses to be incurred
by a department or a state [in the case of budget making by the government].
Although time-consuming, this is a more appropriate way of budgeting. At the end of
the day, it is a companys call as whether it wants to invest time and manpower in the
budgeting exercise to provide more accurate numbers or go for an easier method of
incremental budgeting.

Equity finance can sometimes be more appropriate than other sources of finance, eg
bank loans, but it can place different demands on you and your business.

The main advantages of equity finance are:

The funding is committed to your business and your intended
projects. Investors only realise their investment if the business is doing
well, eg through stock market flotation or a sale to new investors.
You will not have to keep up with costs of servicing bank loans or
debt finance, allowing you to use the capital for business activities.
Outside investors expect the business to deliver value, helping you
explore and execute growth ideas.
The right business angels and venture capitalists can bring valuable
skills, contacts and experience to your business. They can also assist with
strategy and key decision making.
In common with you, investors have a vested interest in the
business' success, ie its growth, profitability and increase in value.
Investors are often prepared to provide follow-up funding as the
business grows.
The principal disadvantages of equity finance are:
Raising equity finance is demanding, costly and time consuming,
and may take management focus away from the core business activities.
Potential investors will seek comprehensive background information
on you and your business. They will look carefully at past results and

forecasts and will probe the management team. Many businesses find this
process useful, regardless of whether or not any fundraising is successful.
Depending on the investor, you will lose a certain amount of your
power to make management decisions.
You will have to invest management time to provide regular
information for the investor to monitor.
At first you will have a smaller share in the business - both as a
percentage and in absolute monetary terms. However, your reduced share
may become worth a lot more in absolute monetary terms if the
investment leads to your business becoming more successful.
There can be legal and regulatory issues to comply with when
raising finance, eg when promoting investments.

Meaning:
Budgetary control is the process of determining various actual results with budgeted
figures for the enterprise for the future period and standards set then comparing the
budgeted figures with the actual performance for calculating variances, if any. First of
all, budgets are prepared and then actual results are recorded.
The comparison of budgeted and actual figures will enable the management to find
out discrepancies and take remedial measures at a proper time. The budgetary
control is a continuous process which helps in planning and co-ordination. It provides
a method of control too. A budget is a means and budgetary control is the end-result.

(a) The objects are set by preparing budgets.

(b) The business is divided into various responsibility centres for preparing various
budgets.
(c) The actual figures are recorded.
(d) The budgeted and actual figures are compared for studying the performance of
different cost centres.

(e) If actual performance is less than the budgeted norms, a remedial action is taken
immediately.
Objectives of Budgetary Control:
Budgetary control is essential for policy planning and control. It also acts an
instrument of co-ordination.
The main objectives of budgetary control are the follows:
1. To ensure planning for future by setting up various budgets, the requirements and
expected performance of the enterprise are anticipated.
3. To operate various cost centres and departments with efficiency and economy.
4. Elimination of wastes and increase in profitability.
5. To anticipate capital expenditure for future.
6. To centralise the control system.
7. Correction of deviations from the established standards.
8. Fixation of responsibility of various individuals in the organization.

Short term sources of working capital financing

Factoring
Factoring is a traditional source of short term funding. Factoring facility arrangements
tend to be restrictive and entering into a whole-turnover factoring facility can lead to
aggressive chasing of outstanding invoices from clients, and a loss of control of a
companys credit function.

Instalment credit
Instalment credit is a form of finance to pay for goods or services over a period
through the payment of principal and interest in regular payments.
Invoice discounting
Invoice Discounting is a form of asset based finance which enables a business to
release cash tied up in an invoice and unlike factoring enables a client to retain
control of the administration of its debtors.
Why not read more about how to compare invoice discounting with factoring?
Advances received from customers
A liability account used to record an amount received from a customer before a
service has been provided or before goods have been shipped.
Bank overdraft
A bank overdraft is when someone is able to spend more than what is actually in
their bank account. The overdraft will be limited. A bank overdraft is also a type of
loan as the money is technically borrowed.
Commercial papers
A commercial paper is an unsecured promissory note. Commercial paper is a
money-market security issued by large corporations to get money to meet short term
debt obligations e.g.payroll, and is only backed by an issuing bank or corporations
promise to pay the face amount on the maturity date specified on the note. Since it is
not backed by collateral, only firms with excellent credit ratings will be able to sell
their commercial paper at a reasonable price.
Trade finance
An exporter requires an importer to prepay for goods shipped. The importer naturally
wants to reduce risk by asking the exporter to document that the goods have been
shipped. The importers bank assists by providing a letter of credit to the exporter (or
the exporters bank) providing for payment upon presentation of certain documents,
such as a bill of lading. The exporters bank may make a loan to the exporter on the
basis of the export contract.
Letter of credit
A letter of credit is a document that a financial institution issues to a seller of goods
or services which says that the issuer will pay the seller for goods/services the seller

delivers to a third-party buyer. The issuer then seeks reimbursement from the buyer
or from the buyers bank. The document is essentially a guarantee to the seller that it
will be paid by the issuer of the letter of credit regardless of whether the buyer
ultimately fails to pay. In this way, the risk that the buyer will fail to pay is transferred
from the seller to the letter of credits issuer.
Long term sources of working capital financing
Equity capital
Equity capital refers to the portion of a companys equity that has been obtained (or
will be obtained) by trading stock to a shareholder for cash or an equivalent item of
capital value. Equity comprises the nominal values of all equity issued (that is, the
sum of their par values). Share capital can simply be defined as the sum of capital
(cash or other /assets) the company has received from investors for its shares.
Loans
A loan is a type of debt which it entails the redistribution of financial /assets over
time, between the lender and the borrower. In a loan, the borrower initially receives
or borrows an amount of money from the lender, and is obligated to pay back or
repay an equal amount of money to the lender at a later time. Typically, the money is
paid back in regular instalments, or partial repayments; in an annuity, each
instalment is the same amount. Acting as a provider of loans is one of the principal
tasks for financial institutions like banks. A secured loan is a loan in which the
borrower pledges some asset (e.g. a car or property) as collateral. Unsecured loans
are monetary loans that are not secured against the borrowers /assets.
Market Invoices offering
Businesses can sell their invoices through us to give them access to the funds that
might otherwise be tied up for between 30 and 120 days. Unlike conventional
working capital solutions, we dont charge clients monthly fees, or require them to
use us a certain number of times a year allowing firms maximum flexibility. Find out
more here.

Sell the invoices that you want, when you want

Unlike traditional invoice discounting, there is no obligation to discount your
entire debtor ledger
No lengthy lock-in periods

Key Differences Between Profit Maximization and Wealth Maximization

The major differences between profit maximization and wealth maximization are:

BASIS FOR
COMPARISO
N

PROFIT
MAXIMIZATION

WEALTH
MAXIMIZATION

1.
h

Concept

The main objective of a

concern is to earn a
larger amount of profit.

The ultimate goal of the

concern is to improve the
market value of its shares.

Emphasizes on

Achieving short term

objectives.

Achieving long term

objectives.

Consideration of
Risks and
Uncertainty

No

Yes

Advantage

Acts as a yardstick for

computing the
operational efficiency of
the entity.

Gaining a large market share.

Recognition of
Time Pattern of
Returns

No

Yes

T
e

process through which the company is capable of increasing earning capacity known
as Profit Maximization. On the other hand, the ability of the company in increasing
the value of its stock in the market is known as wealth maximization.
2.

Profit maximization is a short term objective of the firm while the long-term
objective is Wealth Maximization.

3.

Profit Maximization ignores risk and uncertainty. Unlike Wealth

Maximization, which considers both.

4.

Profit Maximization avoids time value of money, but Wealth Maximization

recognizes it.

5.

Profit Maximization is necessary for the survival and growth of the enterprise.
Conversely, Wealth Maximization accelerates the growth rate of the enterprise and
aims at attaining the maximum market share of the economy.

Profit Maximization is the capability of the firm in producing maximum output with
the limited input, or it uses minimum input for producing stated output. It is termed
as the foremost objective of the company.
It has been traditionally recommended that the apparent motive of any business
organization is to earn a profit, it is essential for the success, survival, and growth of
the company. Profit is a long term objective, but it has a short-term perspective i.e.
one financial year.
Profit can be calculated by deducting total cost from total revenue. Through profit
maximization, a firm can be able to ascertain the input-output levels, which gives the
highest amount of profit. Therefore, the finance officer of an organization should
take his decision in the direction of maximizing profit although it is not the only
objective of the company.

Definition of Wealth Maximization

Wealth maximization is the ability of a company to increase the market value of its
common stock over time. The market value of the firm is based on many factors like
their goodwill, sales, services, quality of products, etc.
It is the versatile goal of the company and highly recommended criterion for
evaluating the performance of a business organization. This will help the firm to
increase their share in the market, attain leadership, maintain consumer satisfaction
and many other benefits are also there.
It has been universally accepted that the fundamental goal of the business enterprise
is to increase the wealth of its shareholders, as they are the owners of the
undertaking, and they buy the shares of the company with the expectation that it will
give some return after a period. This states that the financial decisions of the firm
should be taken in such a manner that will increase the Net Present Worth of the
companys profit. The value is based on two factors:
1.

Rate of Earning per share

2.

Capitalization Rate

The Advantages of Internal Sources of Finance

Financing a business through internal sources of capital involves using
available sources of capital such as personal savings and business
reserves to finance business expansion and operations, rather than
seeking loans and credit from external sources. This approach to financing
business activities is only possible when the business's principals have
sufficient funds at their disposal to allocate some for their company's use.
Decision-Making Freedom

When you finance your business activities internally, you are not
accountable to any outside entity. You don't need to explain your business
decisions to anyone outside your company or seek their approval before
making changes or expanding. This decision-making freedom enables you
to weigh personal as well as financial considerations when choosing the
right course of action for your business. For example, if you have financed
your business internally and you find yourself feeling drained and
depleted, you can make the decision to take some time off or hire
someone to replace yourself temporarily, even if this is not the wisest
path from a strictly objective financial standpoint. If you were accountable
to an outside financial entity, it might be more difficult to take care of your
personal needs because they would probably pressure you to consider
only the financial health of the business.
Flexibility

Internal financing allows you considerably more flexibility than

outside sources of capital. If you finance you business internally and you
experience a slow period that makes it difficult for you to repay a loan
according to the schedule you have outlined, you can simply make an
extra payment the next month. With internal financing it is usually easy to
adjust payment terms in accordance with your current business cash flow
and other unanticipated circumstances.
Credit Score Consequences

If you finance your business internally and have difficulty making

your payments, this will not affect your credit score because you will not
report yourself to the major credit agency if things do not go as planned.
Internal sources of financing, like cash drawn from a company's operating
budget or capital income to fund a project or expansion, may be the
simplest form of financing; this allows the company to make decisions

quickly while avoiding the wait for financing approval and avoiding the
cost of paying interest or dividends. However, this type of financing has
important drawbacks that may mean that it is not always the best choice.
Capital Needs

The chief concern with internal financing is that when you take
money from your operating budget or capital, it leaves you with less
money to manage daily expenses. In this way, using internal sources of
financing for company endeavors can compete with budgets already in
place. For this reason, internal investment is usually used to finance small
projects and investments, where the costs are small, the payback quick,
and the estimated returns significant.
Knowledge Requirements

When a company evaluates whether to use internal financing for

something, it has to be able to estimate with reasonable accuracy the true
costs of the project and provide an accurate forecast for recoupment of
the investment. It also has to determine whether the return is adequate
enough to justify the type of investment; the acceptable minimum level of
return is referred to as the "hurdle rate." The accuracy of these
calculations depends on how well the company is able to estimate its
costs, predict trends and manage the budget outlined. When a company
applies for external financing such as a loan, these calculations and
figures are scrutinized because the creditor would stand to lose if the
company later found it could not repay the debt; internal financing lacks
this secondary "audit."
Tax Benefits

Further, there are other benefits of external financing that internal

sources of financing don't have, such as the tax benefits of having
external debt. The interest the company pays on external debt is tax
deductible, as is the depreciation of any asset purchased. For this reason,
the higher a company's tax rate, the more external financing or debt it is
likely to have in its capital structure.
Discipline

Moreover, internal financing is so easy that it leads to a lack of

discipline. The company risks becoming inefficient or even complacent
unless it strictly monitors the project's investment, budget and any
increase in earnings that stems from the project. These actions would

normally be required if the company took on debt, such as a loan, or used

external financing like issuing stock.

What is the Master Budget

The master budget is a one-year budget planning document for the firm encompassing all
other budgets. It coincides with the fiscal year of the firm and may be broken down into
quarters and, further, into months. If the firm plans for the master budget to be an ongoing
document, rolling from year to year, then normally a month is added to the end of the budget
to facilitate planning. This is called continuous budgeting.
The budget committee usually develops the master budget for each year, guided by the
Budget Director, who is usually the Controller of the company.

Concept And Process Of Preparing Master Budget

Concept Of Master Budget
The master budget is prepared for a specific period and is static rather than flexible.
Master budget is a comprehensive plan, a coordinated set of detailed financial
statement of the operating plans and schedule for a short period, usually a year. It is
the organization's formal plan of action for forth coming budget period. Master
budget is a complete financial presentation of the operating plans of the entire
company for the budgeted period. It presents all the information to the depth
appropriate for the top management action. Master budget is a best media of
understanding the company's micro economics relating to the forthcoming budget
period. The schedule takes the shape of functional budgets. Master budget is a
summary budget which incorporates all the functional budgets and it may taken the
form of profit and loss account and balance sheet at the end of budget period. The
master budget embraces both operating decisions and financial decisions. The
operating divisions are incorporated in operating or functional budgets. Functional
budgets are based for master budget. That is, preparation of master budget is not
possible without preparing functional budgets.
Functional Budgets
* Sales Budget
* Production Budget
* Direct Material consumption Budget

* Material Purchase Budget

* Direct Labor Budget
* Factory Overhead Budget
* Cost Of Goods Sold Budget
* Selling Expenses Budget
* Administrative Expenses Budget
Financial Budget
* Capital Expenditure Budget
* Cash Budget
* Projected Income Statement
* Projected Balance Sheet

Process Of Preparing Master Budget

Some of the budget listed above can not be prepared until other budgets on the
list are first prepare and completed. For example, the production budget in
manufacturing company and the merchandise purchase budget in trading business
cannot be prepared until the sales budget is available. As a result budgets within the
master budget must be prepared in a definite sequence as follows:
1. Preparation Of Functional Budget:
a) Sales Budget
b) Production Budget
c) Direct Material Budget: Direct Material Uses Budget, Direct Material Purchase
Budget
d) Direct Labor Budget
e) Factory Overhead Budget
f) Cost Of Production Budget
g) Cost Of Goods Sold Budget
h) Selling And Administrative Budget
2. Preparation Of Financial Budgets:

a) Budgeted Income Statement

b) Cash collection and distribution budget
c) Budgeted Balance Sheet

Over Capitalization:
A company is said to be overcapitalized when the aggregate of the par value of its
shares and debentures exceeds the true value of its fixed assets.In other words,
over capitalisation takes place when the stock is watered or diluted.
It is wrong to identify over capitalisation with excess of capital, for there is every
possibility that an over capitalised concern may be confronted with problems of
liquidity. The current indicator of over capitalisation is the earnings of the company.
If the earnings are lower than the expected returns, it is overcapitalised.
Overcapitalisation does not mean surplus of funds. It is quite possible that a
company may have more funds and yet to have low earnings. Often, funds may be
inadequate, and the earnings may also be relatively low. In both the situations there
is over capitalisation.
Over capitalisation may take place due to exorbitant promotion expenses, inflation,
shortage of capital, inadequate provision of depreciation, high corporation tax,
liberalised dividend policy etc. Over capitalisation shows negative impact on the
company, owners, consumers and society.

Under capitalization:
Under capitalisation is just the reverse of over capitalisation, a company is said to be
under capitalised when its actual capitalisation is lower than its proper capitalisation

as warranted by its earning capacity. This happens in case of well established

companies, which have insufficient capital but, large secret reserves in the form of
considerable appreciation in the values of fixed assets not brought into books.
In case of such companies, the dividend rate will be high and the market value of
their shares will be higher than the value of shares of other similar companies. The
state of under capitalisation of a company can easily be ascertained by comparing of
a book value of equity shares of the company with their real value. In case real value
is more than the book value, the company is said to be under capitalised.
Under capitalisation may take place due to under estimation of initial earnings,
under estimation of funds, conservative dividend policy, windfall gains etc. Undercapitalisation has some evil consequences like creation of power competition, labour
unrest, consumer dissatisfaction, possibility of manipulating share value etc..

Sn
RESERVES AND SURPLUSES

Reserve means a provision for a specific purpose. There are lots of unknown
expenditures which can occur in current year or in future. To meet such type of
expenses the business firm has to make the reserves. By maintaining the reserves,
actual position of the profit and loss of any accounting year does not disturb. For
example:- share premium account, provision for bad debts or capital redemption
reserves. Capital redemption reserves can be used as bonus shares and converted
into share capital. Reserves are also the part of capital of company other than share
capital. These reserves can not be distributed among the shareholders as dividend.
Surplus is the credit balance of the profit and loss account after providing for
dividends, bonus, provision for taxation and general reserves etc. Surplus profit may
also be earmarked for special purposes such as reserves for obsolescence of plant
and machinery. Balance of profit is carried forward in next year as retained earning.
General reserve can be used for distribution of dividend among shareholders when
profit is insufficient.

net worth
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Definitions (2)
1. For a company, total assets minus total liabilities. Net worth is an important
determinant of the value of a company, considering it is composed primarily of all
the money that has been invested since its inception, as well as the retained
earnings for the duration of its operation. Net worth can be used
to determine creditworthiness because it gives a snapshot of
the company's investment history. Also called owner's equity, shareholders' equity,
or net assets.
2. For an individual, the value of a person's assets, including cash, minus all
liabilities. The amount by which the individual's assets exceed their liabilities is
considered the net worth of that person. Automated online tools, such as Personal
Capital, can make net worth calculation and tracking an easy task.

Balance Sheet Ratios

Balance sheet ratios are financial metrics that determine relationships
between different aspects of a companys financial position i.e. liquidity
vs. solvency. They include only balance sheet items i.e. components of
assets, liabilities and shareholders equity in their calculation.
Explanation
Balance sheet is the financial statement that provides a picture of a
companys financial position by listing a companys assets, liabilities and
shareholders equity. Income statement and cash flows statement provides
information about profitability and cash flows.
A financial ratio determines relationship between two components. These
may include:

Two balance sheet components, i.e. assets, liabilities and

shareholders equity
Two income statement components, i.e. sales, gross profit, net
income, etc.
A balance sheet component and an income statement component

An income statement component and a cash flows statement

component
A balance sheet component and a cash flows statement component
A balance sheet ratio belongs to the first category, i.e. it includes either
two classes of assets, assets and liabilities, assets and shareholders
equity, liabilities and shareholders equity.

Cash Budget
A cash budget is a budget or plan of expected cash receipts and disbursements
during the period. These cash inflows and outflows include revenues collected,
expenses paid, and loans receipts and payments. In other words, a cash budget is
an estimated projection of the company's cash position in the future.
Management usually develops the cash budget after the sales, purchases, and
capital expenditures budgets are already made. These budgets need to be made
before the cash budget in order to accurately estimate how cash will be affected
during the period. For example, management needs to know a sales estimate before
it can predict how much cash will be collected during the period.
Management uses the cash budget to manage the cash flows of a company. In other
words, management must make sure the company has enough cash to pay its bills
when they come due. For instance, payroll must be paid every two weeks and
utilities must be paid every month. The cash budget allows management to predict
short falls in the company's cash balance and correct the problems before payments
are due.
Likewise, the cash budget allows management to forecast large amounts of cash.
Having large amounts of cash sitting idle in bank accounts is not ideal for companies.
At the very least, this money should be invested to earn a reasonable amount of
interest. In most cases, excess cash is better used to expand and develop new
operations than sit idle in company accounts. The cash budget allows management
to predict cash levels and adjust them as needed.
What is the 'Combined Ratio'

The combined ratio is a measure of profitability used by an insurance company to

indicate how well it is performing in its daily operations.
The combined ratio is calculated by taking the sum of incurred losses and expenses
and then dividing them by earned premium. The ratio is typically expressed as a
percentage. A ratio below 100% indicates that the company is
making underwriting profit while a ratio above 100% means that it is paying out more
money in claims that it is receiving from premiums. Even if the combined ratio is
above 100%, a company can potentially still make a profit, because the ratio does
not include the income received from investments.
Many insurance companies believe that this is the best way to measure the success
of a company because it does not include investment income and only includes profit
that is earned through efficient management.
Calculated as:

Flexible Budget
A flexible budget, also called a variable budget, is financial plan of estimated
revenues and expenses based on the current actual amount of output. In other
words, a flexible budget uses therevenues and expenses produced in the current
production as a baseline and estimates how the revenues and expenses will change
based on changes in the output. This is why its often called a variable budget.
Management often uses flexible budgets before a period to predict both a best case
and worse case scenario for the upcoming accounting period. This provides a "what
if" look at the future of the companys financial performance.
Flexible budgets can also be used after an accounting period to evaluate the
successful areas and unsuccessful areas of the last period performance.
Management carefully compares the budgeted numbers with the actual performance

statistics to see where the company improved and where the company needs more
improvement.