Types of Budgets

Budgeting

The budget is basically future estimates of revenue or cost. Budget is play very important rule in directing organization activity to achieve long term goals. Budget also serves the purpose of controlling the organization resources. Budgets can also be used for the purpose of performance measure of different manager and center.

Types of budgets

There are mainly the following types of budgets commonly prepared in the organization.

1. Periodic budget
2. Rolling budget
3. Fixed budget
4. Flexible budget
5. Incremental Budgets
6. Zero based budget 

Periodic budget

The periodic budget is prepared for a period for example for one year and does not change during the period.

Rolling budget

The rolling budget is also known as continuous budget and budget is updated after a specific period of time. The concept is that budget is updating after some period of time. The advantage of this method is that budget is regularly updated and new situation incorporated in the budget, however this type of budget has little budgetary controls.

 Fixed Budget

A fixed budget does not change with level of activity. For example a construction manager has prepared a fixed budget for the construction of a bridge and site manager require completing the construction work within this budget. The fixed budget has no answer in certain situation where the budget depends on the level of activity.

Flexible budget

A flexible budget changes with level of activity.  i.e (number of unit produced). For example for 10,000 units the production cost was 18,000 and for 12,000 unit production cost was 20,000. This budget is more practical approach of budgeting because budget are prepared for operation and activities and this method give due consideration to level of activity.

Incremental Budget

The incremental budget use the last year budget as base and the incorporate inflation and other factor in that budget in that and thus a new budget is prepared.

Advantages of incremental budget

1.      This is very simple

2.      The Time is saved

Disadvantages of incremental budget

The main disadvantage of incremental budgeting is that the manager will manipulate the figure to get the desired level of performance in the next period. For example sales manager would keep the sales figure low so there would be not pressure to achive that level. Similarly the production manager would keep the wastage level high so that no one will ask him about the high level of wastage in future.

Zero Based Budgets

Zero based budgets are prepared from the scratch. This concept try to eliminate the wrong projection and encourages to prepare the budget on facts and not merely the changing the number in excel sheet. The biggest limitation of Zero based budget is time consuming.

 Advantages of Zero based budget

Justified Figures

The budget includes only the justified figures and each manager has to justify the figures before it is included in the budget. The manager has to prepare a proper case for approval.

Put Manager Responsibility

This system of responsibility is evoked by the Zero budget system. The manager take the responsibly of preparing the budget and then they are responsible to produce results in accordance with budgets.

Accuracy and Realistic

This system ensures the preparation of more realistic and accurate budget.

Disadvantages of Zero Based Budgets

Time consuming

The zero based require a detail research by the relevant manager therefore it require much time of manager to prepare the budget.

Formal

This process is very formal and it requires a lot of time and energies of manager and the manager cannot focus on their main tasks.

Pressure

This budget put extra pressure on manager for accuracy of estimates and then achievement of target set by themselves.

Attempt of actual figures

This budget tries to prepare the budget with accuracy. The basic definition that budget is a estimate is ignored.

Working Capital Management

Working Capital Management

The typical formula to calculate the working capital is current asset - Current liability. The current liabilities like creditor is a free financing so organization must avail the free financing ,however, on other hand current must be available to pay the current liabilities when they fall due.

Working Capital Requirement

Working capital requirement changes business to business. The other factor may be considered important while determining the working capital requirement includes the following

• Level of stock and availability of stock
• Supplier credit policy and business relationship
• requirement for effective operations

Current Ratio


The ration mainly depends on type of industry , however, in general a 2:1 ration is considered to be healthy. the underlying concept is that even after paying the current liabilities sufficient funds are available for operations.

Types of Investment Appraisal

Investment Appraisal

Investment appraisal basically is a decision making process about investment. whether an investment is to be made in a particular project or not.

Types of Investment appraisal

Types of investment appraisal sometime also refer as technique of investment appraisal . There are following important types of investment appraisal.

1. Pay back
2. Return on capital Employed
3. Net Present Value
4. Internal Rate of Return

Pay Back
 - The amount of period is required to recover the initial investments
Advantages of Pay back Technique

• Easy to calculate
• useful technique for high risk projects

Limitation of Pay Back Technique

Return on Capital Employed -it takes into account the profit

Hedging Techniques

Hedging Techniques

Basically hedging mean the reducing or eliminating the risk factor.

Types of Hedging Techniques

Basically there are two types of hedging techniques

1. Internal Hedging Technique
2. External Hedging Technique

1.Internal Hedging Techniques

with the help of internal hedging techniques risk is reduced however total risk elimination is not possible whereas with help of external hedging techniques risk elimination is possible.



The following are the internal hedging Techniques

1. Invoicing in local currency
2. Advance payment from customer (Leading)
3. Netting also know as netting

2. External Hedging Techniques

The following are important external hedging techniques

1. Forward Contract
2. Money Market involvement
3. Currency Contract
4.  Future Contract
5. Currency options

Types of entries in equity market

Equity Market

Stock exchange is normally is considered to be equity market. This is a place where the shares of listed/quoted companies are bought and sold. The two main objective of equity market.

1. Investors are available to companies
2. Investor can readily sell their shares

Types of entries in equity market

Basically there are four types of entry available for companies.

1. Issue share to public at fixed price
2. Issue shares by tender
3. Private company get listed
4. Issue share to institutions

1.Issue share to public at fixed price

Normally this method is adopted by in case of initial subscription. The company advertised in national newspaper to get the share of a company at a fixed price. 

If the share applied is more than shares offered then the company decides the successful bidder by ballot. The each subscriber offered equal number of shares in case of subscription.

2.Issue share by tender

It is kind of open offer to the public or financial institution to bid for the share in junk. The highest bidder is selected. The price is fixed by open operation of the market.

3 Private Company listed

There is shares are offered to public rather public can buy shares once the company is got enlisted in stock exchange.

4. Issue Share to institution

Under this method shares are offered to financial institution. This method is a quick fund raising with minimum issuing related cost and procedures.

Types of Efficient Securities Market

Efficient Securities Market

Characteristics of Efficient Securities Market
The following are important characteristics of efficient security Market.

• Informed decisions are made by investor
• Information available to investor for making informed decision making
• Transaction costs of trading securities are reasonable.
•  Market not influence by some individuals

Types of Efficient Securities Market

Basically there are three types of Efficient Securities Market

1. Weak Market
2. Semi Strong Market
3. Strong Market

Types of Capital Rationing

Capital Rationing

Capital Rationing mean limited available sources of funding to implement the projects.
Types of Capital Rationing

There are mainly two types of Capital rationing

1. Hard Capital Rationing- imposed by external factors
2. Soft Capital Rationing - internally imposed by Management

Reason for Hard capital Rationing

The following are the main reasons for Hard Capital Rationing

• Poor performance
• Poor Management
•  Adverse Economic Conditions

Reasons for Soft Capital Rationing

• Management want to concentrate on main business
• Limited Skilled Management to undertake many projects
• Management is not interested in external borrowings

Advantages of IRR

IRR

IRR stands for Internal Rate of Return and this is a stage whether NPV become Zero. The internal rate of return is compared with the cost of capital and if the irr is greater than cost of capital then project may be accepted.

Advantages of IRR

• Based on Cash flow
• Relatively easier to calculate than NPV
• Mutually exclusive project can not be explained

Important Factors of Time Value of Money

Time Value of Money

The concept is very simple that the worth of money changes with time. Therefore the future cash flow are discounted to get present value of future cash flows. it means that if 5000 is expected to inflow after 5 years is discounted to find the current value of 5000.

There are mainly three reasons for introducing the concept of time value of money.

1. Inflation
2. Risk factor
3. Interest Factor

Example of time value of money

The simple example is that if Mr. A give 1000 USD to Mr. B and Mr. B is required to pay back 1000 in 20 years so after 20 years the worth of 10,000 would not be same and therefore the interest element is added.

Methods of Forecasting Demand

Methods of Forecasting Demand

There are four types of methods for forecasting demand.

1. Perform Market Survey
2. Testing Market
3. Estimates of Sale force Team
4. Professional Assessment
5. Past Sales Record and Experience

Reasons for Holding Money

Reasons for Holding Money

The money may earn more profit for the organization. Therefore money must be invested but reasonable amount of money is required to be hold for following reasons.

1. Smooth Operation of Business :- The smooth operations of business need funds.

2. Unplanned expenditure :- There must be sufficient fund available to meet some emergency funds requirement.

3. Opportunity of investment :- Sometime a good investment opportunity is available at a lower rate . This opportunity can only be availed if some liquid funds are available.


The surplus fund available after taking into account above mentioned factor must be invested in a project which have a positive NPV.

Divisible and Non Divisible Project

Divisible Projects:-

The divisible project mean that company can take some part of project. it means that some project are completed in full and other is taken in part. This concept is maximize utilization of fund in fact full utilization of fund.
There is process to select the projects

1. The Profitability index of each project is calculated
2. on the bases of profitability index calculation projects will be ranked.
3. Select a combination with maximize the NPV

Non Divisible Project:-

The project can be undertaken or refused . The project can not be undertaken into parts.

1. Work out the possible combination
2. Select a combination to maximize NPV

Types of Money Market Instrument

Types of Money Market Instrument

The money market is a market where different financial instrument are traded . The money market is basically a trading venue for financial institution and other large scale enterprise to trade in different kind of financial instruments. The following types of financial instrument are traded in money market.

1. Short Term investments
2. Long Term investment
3. Deposit Certificate
4. Treasury Bills
5. Foreign Exchange
6. Discounting Bill of Exchange

Market Risks

 Market Risks

There are basically two type of Market Risks

1. Systematic Risk
2. Unsystematic Risk

Exchange Rate Risks

 Exchange Rate Risks

There are basically three types of Exchange Rate Risks

1. Transaction Risks
2. Economic Risks
3. Translation foreign currency risk

1.Transaction Risk 

 There are mainly two types of risk which can be classified as transaction risk. one type of risk that you trading and receiving payment in future so the amount of receivable is not certain and other type is short term loan with repayment schedule in future again the amount receivable can not be predicted . The Hedging techniques are used to reduce the risk.

2.Economic Risk 

This risk relates to the long term investment made in another country and the future remittances are not certain. This is basically long term arrangement and therefor it is difficult to minimize the risk by hedging Technique.

3.Translation Risk 

This risk is referred to reporting of foreign transaction in the financial statement.

Types of Financial Decisions

Types of Financial Decisions

The Management is required to make following types of financial decision.

1. Investment Decisions
2. Capital Structure Decisions
3. Dividend Decisions

Types of Investment Decisions
The investment decision is further classified into three areas which includes following.

1. New projects Decision
2. Working Capital Requirement Decisions
3. Short Term Investment of surplus fund

Important Factor for Project and short term Investment

The management must consider the following factor before investing in new projects or placing funds in short term investment.

1. Rate of Expected Return
2. Risk involved in particular project or investment

Types of Financial Decisions

The management has to make the following Financial decision

• How much finance Required
• Which project is to be financed
• How much dividend is to be paid
• How to arrange the finance
• For how long Finance required

Types of Dividend Decisions

The management has to decide that how much dividend to be distributed depends on following factor.

1. Source of funding
2. Cash flow requirement of the entity
3. Share holder expectation for Dividend
4. Companies ordinance requirement

The investment decision diffidently require the special consideration for the rate of return because the investment is made to earn profit but the return rate and risk associated are taken into account jointly. Because some investment offer you tremendous profit opportunity but involve very high risk. This is important to understand that investment decision must be rational both in terms of rate of return and risk associated with those decision.


The financial structure of the entity is also important decision is to be made. The different structure offer different advantages and disadvantages . some offer flexibility and other involve high cost. Therefore the management has to decide a mix which serve its purpose in best possible way.

Types of Dividend Policies

Types of Dividend Policies

There are basically three types of dividend policies or approaches

1. Stable Dividend Policy
2. Constant Payout Ratio Policy
3. Residual Dividend Policy

1.Stable Dividend Policy 

:- Under this policy the share holder are paid dividend at a fixed rate. This approach is very common in use because it regulate the share price effectively and prohibit any share fluctuation in share prices.

2.Constant Payout Ratio Policy 

 Under this policy a particular portion of profit is paid out as dividend. This policy is profit oriented and dividend of each period will be changed . Under this policy price of share are subject to fluctuate at market news about the profitability.

3.Residual Dividend Policy 

 Under this policy after the funding requirement of the organization , all surplus funds are distributed among share holder in the form of dividend.

Types of Debt Finance

Types of Debt Finance

The following are important debt finance available to the organization,

1. Preference Shares
2. Debentures
3. Bonds
4. Bank Loans
5. Finance Lease
6. Sale and Lease Back
7. Trade Credit
8. Bank Overdraft
9. Mortgaged Loan

The above mentioned debt finance can be classified as under

1. Long Term Debt Finance
2. Medium Term Debt Finance
3. Short Term Debt Finance

Long term debt finance typically means the finance for more than five years . This finance include preference share, Debentures, Bonds
Medium term Finance typically means the finance between three to five years. This finance include finance lease, Sale and leaseback,.
Short Term Finance typically mean finance for up to one year and includes bank overdraft, trade credit.

Debentures

What are Debentures

The debenture is an instrument issued by company to obtain long term finance normally for more than ten years. The instrument is issued under company common seal and term of debenture are mentioned at the debenture instrument. 


The debenture can be classified into two types

1. Secured Debenture
2. Unsecured Debenture

1.Secured Debenture 

A denture can be issued against fixed charges or floating charge and in case of default such assets can be sold to pay the debenture loan. The debenture normally offer fixed rate of return .

2.Unsecured Debenture 

 The unsecured debenture does not carry any security for repayment . This facility is more like a trade credit for long term with and fixed rate of return.

Business Valuations

Business Valuations

There are basically three type of business valuation.

1. Asset based Valuation
2. Earning Based Valuation
3. Dividend Based Valuation

1.Assets based Valuation 

This is the valuation in which the balance sheet values are used to calculate the price of the business. The calculation is made by deducted liabilities form the assets and the remaining value is the business value of the company.

Types of Bonds

Types of Bonds

The bond is typically a un secured debenture , however, sometime bond and debenture are used in same meaning. The following the main types of bonds available in the market.

1. Simple Bond
2. Deep Discount Bonds
3. Zero Coupon Bonds

Simple Bond :- A simple bond mean a bond carry a fixed rate of return issued at nominal value.

Deep Discount Bond :- A bond which is issued at discount and will be redeemed at nominal value. This bond also carry a fixed rate of return, however, this rate is far below than market rate of ordinary bond.


Zero Coupon Bond :- The bond is another type of deep discount bond but this type does not carry any fixed rate of return.

Asset based Valuation

Asset based Valuation

There are following types of Assets based Valuation

1. Net Book Value Method
2. Net Realizable Value Method
3. Replacement Cost Method

1.Net Book Value Method

In this method the value is calculated by deducting the liabilities from the assets and the residual amount is the value business. The amount is calculated on the book value of the assets and liabilities.

2.Net Realizable Value Method

This method is extension of net book value method with inclusion of net realizable value instead of book value. This method is used to calculate the minimum acceptable price.

3.Replacement cost Method.

This method explains that how much it will cost to build a new business from this stage. This method is used to calculate the maximum acceptable to the owner.

Simulation

What is Simulation

Simulation basically is an extension of sensitivity analyses. in sensitivity analyses we focus one variable at a time where in case of simulation we can look into more than one variable. The simulation technique is more complex than sensitivity analyses.

1. More than one variable

in simulation technique two are more variable are taken into account to determine there impact.

2. Critical Variable Identification:- 

This method identify the critical variables for decision making.

3. Relationship Study:- 

This technique help to understand the relationship between different variables to achieve desired outcome.

4. Independent Selection of variable :- 

The variable selected randomly , so an independent analyses can be performed.

Sensitivity Analyses

 Sensitivity Analyses

The sensitivity analyses is basically is to observe the result due to changes made in the variable. In simple word it is used to calculate the impact of particular change.

Advantages of Sensitivity Anlyses

1.Check the initial Estimate :-

 This is an important tool to judge the expected variation in the initial estimates about the project. For example the initial estimate is that profit would be 10 million in case of 100 million sales, but what would be the results if the sales value would be 80 million.

2.Data Adequacy and Importance:-

 The Management frequently use the important data repeatedly so management would love to verify the accuracy of data used and its importance.

3.Critical Areas to be Focused:- 

This process identify to management what are the critical success factor or area for them. This information is really useful to perform the planning function especially controlling and decision making.

4.Interesting Exercise :- 

This is an interesting exercise for the management , when they can predict the future with the help of different data input

Payback Period

 Payback

The payback period method we calculate the period in which the investment is received from the project.

Advantages of Payback

1.Easy to calculate

This method is very easy to calculate and does not involve complex calculation 

2. Easy to interpret

This method can easily be explained and interpret . This period can simply explain that how long will it take to recover the investment.

3.suitable in High Risk project

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Disadvantages

1. Limited in scope

it does not take into account all cash flow and only limited cash flows are considered.

2. More focus on recovery 

This method put little light on the profitability of the project.

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Advantages of JIT inventory System

Advantages of JIT inventory System

The Just in time inventory system focus to order inventory when it is required.This system has number of advantages which includes the following

Holding Cost is Reduced
The main advantage is the holding cost which includes ware house cost, insurance cost etc are reduced.
Risk of physical Damage Reduced
There are number of physical risk attached to inventory such as fire , earthquake . with introduction of this system these risks are reduced.
Better Control over inventory
This system improves organization control over the inventory.

Advantages of Internal Equity

Advantages of Internal Equity

The internal equity financing is referred to use the retained earning , it means that payment to share holder in the form of dividend is restricted and fund are utilized as financing source.
The following are the primary advantages of using internal equity.

1. No issue Cost:- Raise equity finance diffidently involve some cost but by using internal equity option this cost is Zero.
2. Ownership Structure does not change :- The other important factor of using the equity financing to keep the ownership structure in tact.
3. No Obligatory payment :- Dividend is not an obligatory payment instead it is at the discretion of management. So liquidity requirement of organization does not suffer.

Discounted Cash Flows

Advantages of Discounted Cash Flows
There are two main advantages of cash flow

1. It is calculated on the bases of future cash flow which are more difficult to manipulate than accounting profit.

 2.This method takes into account the time value of money which is important aspect of decision making for future investment.

Accounting Rate of Return

Accounting Rate of Return

Under this method the average profit is divided by the average investment. The results then compared with the expected result and if the results meet the expectation then project is accepted.

Formula for Accounting Rate of Return

= Average Profit/Average Investment

Average Investment =(Initial Investment + Residual Value)/2

Advantages of Accounting Rate of Return

1. Easy to Calculate

This method is based on profit therefore it is easy to calculate and understand. This method does not require any special skill for calculating the result under this method.

2. More Reliable

This method is based on financial statement therefore can be relied.

3.Cost Saving

Financial manager can easily calculate the result under this methods therefore no special consultant or financial expert is required. Therefore heavy cost of such consultant may be saved.

Disadvantages of Accounting Rate of Return

1.Manipulation of Profit

As the profit can be manipulated therefore the results under this method can also be manipulated.

2. Different Results

As the profit can be calculated in different way therefore the result under this method may vary .

3. Time Value is ignored

Time value is ignored under this method.

4. Little Light on investment

This method put little information the timing of investment.

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