Research Korner: Finance

A Literature Review on Accounting Treatment on Employee Stock Option

Accounting Treatment on Employee Stock Option   This tract provides a concise assessment of the employee stock options and the significance of the accounting treatment including its procedures and latest alterations.  It overtly deem the vesting period, the possibility of employees leaving the company during the life of the option, the inability of employees to trade their options, and dilution issues based on the Financial Accounting Standards Board (FASB).  This paper will also establish the pros and cons in having stock options as employees’ incentives as well as suggested methods in calculating the value of stock options.   1.0       Employee Stock Options A stock option is offered by corporations to its employees as incentives giving them a privilege to an employee to purchase a stock of the company at a specified duration of time and at a specified price (Short, 2002).              To easily comprehend the subject and for the sake of certainty, the term options pertains to the options issued by the company on its own stock.  There is a vesting period of during which the options cannot be exercised.  Fundamental rules apply that when an employee leave their jobs (voluntarily or involuntarily) during the vesting period, they automatically forfeit their unvested options, however, if the employee leaves after the vesting period, they forfeit options that are out of the money and they have to exercise vested options that are in the money immediately.  Employees are prohibited to sell their employee stock options.  They must exercise the options and sell the underlying shares in order to realize a cash benefit or diversify their portfolios. And as for the company, once options are exercised, they will be required to issue a new and reformed Treasury Stock (Hull & White, 2003).   2.0       Accounting Treatment One issue in expensing stock options concerns the timing of the recognition of the expense.  Financial Accounting Standards Board (FASB) Section 123 favors recognizing the expense on the grant date. The company can choose to make an estimate of the options that will not vest and reduce the amount of the expense accordingly. Alternatively, it can calculate the expense on the assumption that all options will vest and later reverse the expense for those that do not. In ED 2 the International Accounting Standards Board proposes that the value of the options be calculated on the grant date. If there is no vesting period, the expense is recognized immediately. If there is a vesting period, the expense is recognized year by year during the vesting period as the employees provide service for the company. FASB 123 regards employee stock options as akin to compensation that is almost certain to be received by the employee. IASB's ED 2 regards them as payment for services performed for the company by the employee during the vesting period. FASB 123's interpretation of the nature of employee stock options is closer to reality. The grant date is the point in time when the company creates a contingent claim against its assets. Few employees regard employee stock options as payment for services provided during the vesting period. It also worth noting that, although the company usually has the option of changing an employee's regular compensation during the vesting period, it does not have the option of adjusting the terms of employee stock options during this period. In our view the vesting period in employee stock options is like the lockout period that is a feature of many over-the-counter derivatives contracts. The vesting period can be viewed as providing another dimension to the contingency in an employee stock option. The employee's ultimate payoff is contingent on how well the stock performs and on remaining employed. The same principles should be used in dealing with all contingencies. Many of the debates concerning executive stock options center on whether they are liabilities of the company or equity claims against the company. The reality is that they are neither. Traditionally accountants have classified claims against a company as debt or equity. With the advent of derivatives markets the nature of the claims that can been outstanding against a company have become considerably more complex.   3.0       Use of Stock Options in Canada Following an initiative decided during the 2001 annual meeting of OECD National Accounts Expert, Canada, being one of the non-European members implements the new accounting treatment for stock options for employees. The value of stock options in Canada, when exercised has been included up to taxation year 1999, as taxable benefits in the tax statement, called T4, which is submitted by employers to employees.  The individual was also taxed on the capital gains, if any, upon the later disposition of the shares.  The budget as of February 28, 2000 introduced an amendment to the Income Act to modify the way in which stock option are taxed.  This proposal allows employees to defer unrealized gains from exercising stock options for publicly listed shares until the disposition of the shares.  However, there is an annual limit of $100,000 subject to deferral.  At present, under the Canadian business accounting principles, companies are not obliged to account for the value of equity remuneration in profit; thus, their reported profits are overstated.  Following the budget change of 2000, the employer will calculate a benefit as was done in the past but now divided into two parts, one called stock option benefit the other deferred stock benefit.   The deferred stock option benefit is not taxed until the disposition of the shares but the stock option benefit is taxable in the year it is reported (Lequiler, 2002). 3.1       For the compensational treatment, the recording in the Canadian System of National Accounts is driven by available data, based on T4 information.  Gains from stock option are exercised and the value is calculated as the difference between market value and exercise price.  The new system introduced in February 2000 did not changed Statistics Canada estimation method:  both stock option benefit and deferred stock option benefit are included in labor compensation, even though the entire amount is not taxed.  Sources for labor compensation are the T4 returns for the annual benchmarks.  Monthly and quarterly estimates are built from the monthly establishments Survey of Earnings, Payroll, Hours (SEPH), which do not contain information on stock options.  On the other hand, quarterly series are projected from the latest annual benchmarks of labor compensation and the corporations keep an eye on media reports to get hints of any major developments on stock options. 3.2       With regards to treatment on profits, the entire amount is expensed in the national accounts against the income.  Profits are estimated from quarterly corporations survey and annual corporations returns to Canada Customs and Revenue Agency.  These estimates are further benchmarked to the estimates of operating surplus derived from annual Input-Output tables.             4.0       Calculation of the Employee Stock Options Value Employers today are focusing increasing attention on the issue of how to value the options they grant to employees. Many simply want to know the value of what they are offering the employees. In addition, employers are moving more than ever toward expensing of the options they grant for earnings purposes – a practice that requires the employer to determine an accurate value of the granted options. Companies also need accurate option values to comply with FASB rules even if they do not expense the fair value but merely mention the values in footnotes (Olagues, 2002) Employees, too, want to know the value of their stock options, whether it is for purposes of evaluating an employment offer, understanding the significance of a new option award, or simply to value their options for investment management purposes. For employers and employees alike, then, the question would be about what method should be used to determine the value of employee stock options. 4.1     Black Scholes Black Scholes, created in 1973 by Myron Scholes and Fischer Black, are mathematical models that give theoretical prices for a particular listed exchange-traded option at any particular time. These models incorporate such variables as the stock price, the exercise price, the expiration date of the option, the expected volatility, any dividends and the interest rate to produce theoretical values for listed stock options.   These methods however are not guaranteed of 100% accuracy for some traders believe that like other methods, it has its own share of faults in valuation of listed-long term options as well as listed options on highly volatile stocks.

A Literature Review on Accounting Treatment on Employee Stock Option

Accounting Treatment on Employee Stock Option This tract provides a concise assessment of the employee stock options and the signif...

An Econometric Model on the Contribution of Micro-finance Institutions to Poverty Reduction

Contribution of Micro-finance Institutions to Poverty  Micro-finance Institutions are viewed as a means to end poverty in many developing nations.  Microfinance is the provision of a broad range of financial services such as <ul type="disc" style="margin-bottom: 0in"> 	<li class="MsoNormal" style="line-height: 200%"> 	 	deposits</li> 	<li class="MsoNormal" style="line-height: 200%"> 	 	loans</li> 	<li class="MsoNormal" style="line-height: 200%"> 	 	payment services</li> 	<li class="MsoNormal" style="line-height: 200%"> 	 	money transfers</li> 	<li class="MsoNormal" style="line-height: 200%"> 	 	insurance to poor and low-income households and their microenterprises</li> </ul> The three types of sources for micro-finance are: <ul type="disc" style="margin-bottom: 0in"> 	<li class="MsoNormal" style="line-height: 200%"> 	 	formal institutions - i.e. rural banks and cooperatives</li> 	<li class="MsoNormal" style="line-height: 200%"> 	 	semiformal institutions - i.e. nongovernment organizations</li> 	<li class="MsoNormal" style="line-height: 200%"> 	 	informal sources - i.e. money lenders and shopkeepers</li> </ul> Institutional microfinance includes microfinance services provided by both formal and semiformal institutions. Microfinance institutions are institutions whose major business is the provision of microfinance services. About 90% of the 180 million poor households in the region still lack access to institutional financial services. (ADB) Most formal financial institutions deny the poor financial services because of <ul type="disc" style="margin-bottom: 0in"> 	<li class="MsoNormal" style="line-height: 200%"> 	 	perceived high risks</li> 	<li class="MsoNormal" style="line-height: 200%"> 	 	high costs involved in small transactions</li> 	<li class="MsoNormal" style="line-height: 200%"> 	 	the poor's inability to provide marketable collateral for loans</li> </ul> ADB, through its Microfinance Development Strategy, aims to ensure permanent access to institutional financial services for the region's poor people and their small businesses.  To achieve this objective, ADB will focus on <ul type="disc" style="margin-bottom: 0in"> 	<li class="MsoNormal" style="line-height: 200%"> 	 	creating a microfinance-friendly policy environment</li> 	<li class="MsoNormal" style="line-height: 200%"> 	 	developing financial infrastructure</li> 	<li class="MsoNormal" style="line-height: 200%"> 	 	building viable retail institutions</li> 	<li class="MsoNormal" style="line-height: 200%"> 	 	supporting pro-poor innovations</li> 	<li class="MsoNormal" style="line-height: 200%"> 	 	supporting social intermediation</li> </ul> Providing the poor with improved facilities to save and to have better access to credit and insurance helps them manage risk, build assets, increase income, and enjoy a better life.  (ADB) The majorities of poor people live in rural areas and have very little opportunity.  Microfinance helps these people who have no collateral.  The economic environments provide business opportunities.  In Nepal for instance, most Nepalese micro entrepreneurs are economically isolated, which means that their market is often local, small and does not offer any demand growth prospects.  Commercial banks and other financial institutions normally do not like to go in that area because of the geographical constraints, underdeveloped infrastructures and other physical constraints. (Sapkota) However, these rural areas have a substantial demand for micro-credit.  If rural people are not brought into the mainstream for economic and social change, there will be no change in rural development.  (Sapkota) Asian Development Bank’s Vision is a region free of poverty.  They know and acknowledge that expanding access to financial services is critical for eliminating poverty and for realizing the Millennium Development Goals.  Recent estimates by the Consultative Group to Assist the Poor (CGAP) indicate that microfinance institutions in Asia have about 41 million loan accounts and 98 million deposit accounts.  (ADB)  The microfinance industry has been evolving over the last 3 decades.  In the early part of the 1980’s, the industry was dominated by nongovernment organizations (NGOs) that created various programs which attempted to address the failure of markets and governments to provide financial services for the poor which relied heavily on external grant funding. (ADB)  ADB’s first microfinance project supported the NGO microfinance institutions in the Philippines.  Some of these programs became flagship operations.  One such operation is the Grameen Bank in Bangladesh.  BRAC’s impressive results generated a lot of interest in microfinance in the broader development community.  (ADB) ADB has supported microfinance for many years. From 1988 to 1999, ADB approved 14 microfinance projects totaling $260.10 million, 13 projects with microfinance components valued at about $106.79 million, and 45 technical assistance projects for about $24.42 million. Recognizing that the industry landscape has changed over the years, ADB began to formulate a microfinance development strategy in 1999 that was approved in May 2000. (ADB) After the strategy was adopted, ADB's assistance shifted from providing support for narrowly defined microcredit projects to building financial systems for the poor. From 2000 to 2004, 10 microfinance loan projects totaling $350.80 million and 16 projects with microfinance components of about $131.02 million were approved. ADB also provided financial assistance to 7 governments to prepare microfinance projects and for 21 advisory technical assistance projects for capacity building at various levels in 12 countries.  (ADB) Another significant change is that microfinance services are no longer considered a niche market activity that should be confined largely to the development community and carried out solely by specialized microfinance institutions. Today, it is believed that if microfinance is to achieve its full potential, it must be fully integrated into a developing country's financial system with access to vast amounts of human, physical, and financial resources and management know-how. (ADB) According to a study by ADB, a paradigm shift toward market-based approaches to poverty reduction is also taking place. In the larger business world, a growing number of established companies including some multinational corporations have achieved impressive results in reaching the poor in innovative ways with their products and services. This reaffirms the feasibility of large-scale commercial microfinance and strengthens private sector interest. (ADB) References: Asian Development Bank.  Microfinance:  Financial Services for the Poor.  12 November, 2009.  Retrieved 22 June, 2011 from http://www.adb.org/microfinance/default.asp Asian Development Bank.  Special Theme: The Changing Face of the Microfinance Industry.  Building Financial Systems for the Poor.  ADB Report 2004.  Retrieved 22 June, 2011 from http://www.adb.org/Documents/Reports/Annual_Report/2004/special-theme.pdf Sapkota, Shanti.  Micro Finance Institutions and It’s Role in Alleviating Rural Poverty in Nepal:  A Socio-economic Analysis.  South Asian Network of Economic Research Institutes (SANEI) Pakistan Institute of Development Economics.  July 2008.  Pp 1-56.  Retrieved 22 June, 2011 from http://www.saneinetwork.net/research/sanei9/Study%2012/Abstract.pdf

An Econometric Model on the Contribution of Micro-finance Institutions to Poverty Reduction

Contribution of Micro-finance Institutions to Poverty Micro-finance Institutions are viewed as a means to end poverty in many develo...

ABC Technique

Executive Summary             This report provides a critical analysis comparing the current costing system of Zauner Ornaments against activity-based costing (ABC) technique.  To do this, the conditions of glass ball ornaments with and without ABC are presented with emphasis on financial data.  It is found that major advantage of ABC is to enhance the profitability of Zauner due to more accurate allocation of costs.  The explanation and supporting details are illustrated below.   Introduction                Even though the market Zauner product is gaining prominence in the market since its inception, the financial performance of the company for the recent years continued to decline.  Due to this there is a need for an investigation that includes both financial and explanatory components for understanding the case.  This will aid Yu in her proposal to adopt a new costing method under ABC approach.  The scope of this report will include analysis of distinctive features of normal and activity-based costing systems.  In addition, it will also discuss the reasons behind the financial performance issues that Zauner is facing.  There are also recommendations to improve the situation and a conclusion.  Most of the analysis is supported with financial data and computations and also facts of the company case.  Although certain costing techniques are also useful to determine the relative advantages/ disadvantages of ABC like standard or value-based costing, the discussion is limited to ABC versus normal costing systems.       Problems in the current costing system It only considered manufacturing costs where in fact the results of the latest financial data showed that transportation costs accounted for 35% of the expenses incurred under selling and distribution.  Second, when estimating the overhead costs, the system used plant-wide overhead rate under the variable "machine hours".  However, the design of processes is semi-automatic and manual work is necessary to complete such phases of manufacturing such as purchasing and scheduling including set-up.  There is a lack of coverage when "machine hours" is used as lone and main variable.  Third, the system cannot handle various changes in the business plan.  The drastic rise in overhead rate is a symptom that machine variable alone is an insufficient representation of real costs of the company.  Since the company is under increasing use of machines due to introduction of up-market products (i.e. specialty glass balls), the system undermined other costs (i.e. transportation).     More generally, normal costing system uses budgeted overhead rates which can distort actual results from operations.  As a result, the increasing machine-based overhead rate pushed the costs requiring more cash to pay, more accounts payable to incur and other reduction in income-related accounts.  In the past years when the firm started to produce other products, the financial alarm did not erupt instantly and required the current financial position and overhead rate to provide their obvious aggravations.  Due to this, the system is responsible for the years of poor financial performance despite good turnover of the newest product line.  The use of machine hours does not only understated indirect manufacturing costs but also the substantial contribution of labor in the completion of other products.          Contribution for improvement and Other Advantages of ABC system The firm is basically under the problem of having good products, production on-demand, successful operations except prior to introduction of other products and currently anxious about its future profitability.  Activity based costing (ABC) will aid in determination of true cost of the product particularly the high cost specialty products.  ABC can propose cost improvement and even strategic plans to increase productivity.  This can reserve the right for more innovative products to be continuously manufactured and polish the view of the manufacturing managers.  Manufacturing costs have minimal insight on how to price products and ABC will broaden this lacking to obtain full benefits.  ABC also focuses on indirect costs or the overhead that is very relevant to the problem of the firm.  Since it intends to trace the cost rather than allocate, the confusion earlier rejected by Yu can be clarified (i.e. seeing transportation as cost) and strategies be streamlined (i.e. management of overhead) accordingly.          Findings in Comparing ABC and Existing Costing System As observed, the unit cost for the specialty ornaments are overstated in the existing system while non-specialty ornaments are understated also in the existing systems compared to ABC results.  This is possible for the existing system because it used machine hours as basis for overhead rate computation and allocation.  As observed, Zauner product lines are high in volume but required no special activities such as stopping the production lines to remove glass remnants in machines eminent in producing products in the production lines.  In effect, machines hours as basis for allocation undermines the presence of labor-intensive requirements of non-specialty products under ABC approach.  Little overhead costs are allocated in specialty products because it did not have many machine hours rather set-up processes while the reverse is true (i.e. enormous overhead) for non-specialty products whose production is less critical and can be mass produced easily.  However, specialty products require much personnel attention that labor hours have substantially jumped under ABC approach.          Recommendations on Costing System for the Firm The firm should change its current system and replaced it with ABC technique.  This can especially gain beneficial returns when the firm decided to expand to up-market brands which would reflect the same manufacturing complexity and labor-intensiveness of specialty products.  If product line expansion is carried in the coming years, much more the significance of ABC is eminent because the manufacturing processes of up-market products are riskier compared to low-cost non-specialty products.  As a result, proper costing is required for the company to maximize the benefits of the expansion.  Since ABC also allocate indirect costs to the overhead (i.e. transportation), the prominence of up-market products in distant places could provide ease of allocation for the firm.  The issue here is the transfer of value from normal places that may not be recognized by the firm and shipping costs are not included in the current system.    In its current manufacturing situation, its semi-automated process does not make "machine hours" a concrete basis for settling an overhead rate.  Emphasizing the error on a company-wide agenda only aggravates the problem.  Also, current departments such as packing and shipping are done manually and so it is obvious that "machine hours" does not represent the cost driver for general expenses of each department.  Further, the firm is a low-cost glass ball producer where it presently made success through market position.  However, its profit continued to slump for consecutive years suggesting that demand-side approach to business is lacking.  As a result, supply-side should achieve value the same manner as the demand-side.  Since the current costing had made substantial understatements especially for specialty product lines, it showed that it cannot reflect measurement of cost-related efficiencies.  ABC can provide such data for the firm to improve its value chain in producing risky and low-volume up-market product line.           Reasons behind Declining Return on Sales As observed in the spreadsheet, return on sales of the current system is 12% which is reduced to only 4% under ABC approach.  This is possible because the decrease in cost of goods sold for Zauner products in ABC is consumed by substantial increase in the same for specialty products.  Cost of goods sold is computed by the multiplying the results of per unit cost in both systems to their corresponding sales volume.  As a result, their difference is eminent where ABC even incurred a loss for the specialty products.  In the issue of poor financial performance and declining return on sales for the past years, the firm is unable to identify the contribution of "labor hours" to cost and the small but complicated volume manufacturing of specialty products.  As a result, it affects its pricing and ultimately its break-even frameworks.  For example, the unit selling price of its small glass balls is only $30.00 well in fact, when labor costs and ABC approach is considered, it can go as high as $70.  With this, it is apparent that the company is selling the good-performing product lines below manufacturing costs.  In effect, positive response from the market for the innovation did not result to rise in bottom-line outcome due to misled and inappropriate costing.               Recommendations on Actions to Take to Improve Performance The firm should use ABC approach especially in specialty and other up-market products.  These products are considered labor-intensive, risky processes and substantial process investment compared to non-specialty counterparts.  In effect, costing approach should be more conservative.  In the operational issue, it should acquire new and dedicated machines for up-market products to increase productivity and also revenues.  It should exploit the lucrative market by coupling investment strategy and costing techniques.  Further, it should continue to produce and design up-market products for the next years to maximize the adoption of ABC technique.  When machines are acquired, ABC can assure that the interference of labor in the process is accounted and this claim creates the synergy that exists between ABC adoption and strategy to expand product line.   Ultimately, the firm can focus its operations into the up-market demand.  It should close its low-cost product line by transferring the brand name its non-specialty products are admired for to the up-market products.  For example, the firm can create discounts in bulk purchases or sell the products in retail markets for ease of discounting promotion.  It should obtain an integrated product portfolio where the up-market is prioritized and non-specialty brand name retained due to the change in market environment.  This issue is concretized by the fact that the cost of shipping and machine investments will increase once the firm continuously create up-market products.  The rise in such costs may require substantial investment which may affect liquidity of the firm.  As a result, its low-cost business portfolio should be gradually reduced and retire once the brand name transfer is effectively executed.           Limitations of the ABC Proposal and ABC in General             Initially, there is an understatement for the cost of producing non-specialty products because they are machine-based units.  At the strategic side, abrupt adoption of ABC which necessarily leads to increase in market price especially of the specialty products can reduce competitiveness of the firm.  This is true especially when there are similar products in the market where up-market producers have lower prices.  Thus, ABC has the weakness of infusing its findings instantly and directly in the market and even investment strategies of the firm in the case of purchasing new assets.  Even if the firm has the information and measurement of performance, it has limited use of them because of the stakeholders involved.  The recommendations above also are not recourses that can be executed immediately.  Time, money and effort are elements necessary to make them reality but the firm is a low-cost producer and substantial investment in assets, processes and change in strategy can likely be impossible due to financial and experience bottlenecks.                     In general, ABC is incompatible with mass production processes and machine-intensive products because activities are minimal.  This is why small and large colored glass ornaments products are understated under ABC because human intervention is very small.  Second, collecting data such as activities and “levels” can be tedious and costly.  A small manufacturing company may not afford the requirements of implementing a company-wide ABC adoption.  Computer systems, trained personnel and continuous evaluation in the manufacturing and non-manufacturing activities should be applied which can be impractical for small manufacturers.  In the behavioral side, ABC can create managerial resistance because it can show the inefficiencies of the processes where their departments are link.  Without support from managers, ABC adoption would be futile.  Conclusion             Zauner should adopt ABC technique is a gradual manner and also doing the same in reducing focus on low-cost product line.  Its transfer of geographical market and success in up-market indicates the change in operating environment that requires adjustment in internal capabilities.  By adopting ABC, its response to external changes and internal adjustments can be measure and evaluated on a periodic basis.  With this, it can analyze whether the strategy should progress or bring back focus on low-cost product line by exporting to low-income countries.  To succeed in ABC adoption, the company should consolidate commitment of managers.  Installing incentives and creating committees to supervise the progress of ABC adoption with a concrete plan in mind should be a starting point to increase motivation to implement and degree of support to a newly established accounting idea.

ABC Technique

Executive Summary This report provides a critical analysis comparing the current costing system of Zauner Ornaments against...

What Would Motivate The Regulators To Develop The New Rules When It Comes On Financial Reporting Standards

There are numerous reasons why do regulators develop new rules when it comes on financial reporting standards. One of the motivations is that the stringent approach to accounting policies and standards is a tool for the government to measure the legitimacy of an entity with regards to its relationship with the public and environment. Actually, financial reporting, let’s say IFRS or IFRS2 is one of the factors that needs consideration not only by the UK business organisations but also by the global community to regulate accounting practices.  Regulators develop new rules because of conformity. The values reported by a certain company should conform to the standards given by AASB, IFRS or GAAP.  Fair values given to companies should also comply with their status in the market.  Meaning, fair values should reflect to the factors in business like its earnings, growth and market. The discussed case in Accounting Headline 7.8 stated that the arrival of IFRS2 will make the means of bonuses largely neutral in profit and loss account terms between cash and shares or share options.  The objective of this IFRS is to stipulate the financial reporting by an entity when it undertakes a share-based payment transaction.  Particularly, it obliges an entity to reflect in its profit or loss and financial position the effects of share-based payment transactions, as well as expenses combined with transactions in which share options are arranged to employees.   For regulators, the new rules are needed to serve as guidance on how entities should decide fair value assessments for financial reporting purposes. The new rules are created because of the issue of consistency. A situation case where some financial statement items are accessible at fair value, while others are offered at cost may confuse financial statement readers.   The motivation of regulators with regard to the development of new rules is to illustrate the economic value of each class of assets and liabilities as if they were independent from each other and other entity resources; these values were linearly additive and as far as potential purged of super profits and managerial purpose. This outlook relies on neither a strong theory nor on empirical evidence. It is really based on an economy with all relevant markets being well organised and in perfect equilibrium, which results in markets consistent with the standard-setters' scenario and in market prices that reflect economic values.  As shown, Accounting Headline 7.8 has examined the issues pertaining to IFRS 2 which is most likely to require an entity to recognise share-based payment transactions in its financial statements, including transactions with employees or other parties to be settled in cash, other assets, or equity instruments of the entity.  The regulators major argument for the creation of new rules should, ideally, recognise the amount of asset cash flows and their timing and expectations of changes therein, the time value of money, the price of the risk inherent in assets, and other factors.

What Would Motivate The Regulators To Develop The New Rules When It Comes On Financial Reporting Standards

There are numerous reasons why do regulators develop new rules when it comes on financial reporting standards. One of ...

Countering the Financial Management Deficiencies of Northern PLC

Introduction Competent financial management is critical to the success and survival of a wide variety of organizations. In the business community, selecting the chief financial officer for advancement to chief executive officer has become increasingly common. For non financial executives and managers, an understanding of the basics of financial management has become even more important during the current era of economic uncertainty. Adequate financial planning is a key element in the success of any business venture. Conversely, the lack of adequate financial planning is often a key element in the failure of many business enterprises. The objectives for both short-term and long-term planning are the same, and the techniques employed differ primarily in the degree of detail developed in the analysis. Both types of planning have as their overriding objective the development of a financial planning and control system to guide the financial future of the firm (Droms 1997). All kinds of firms need to make sure that their finances are well managed. The finances are used to pay for everything that helps the firm operate. It is used to pay for materials and resources used by the firm. Just like other companies Northern PLC has strategies to ensure that their finances is well managed but there are some deficiencies on deficiencies in the financial management systems of the company.  There were already some discussions with the divisional heads on the key areas for improvement. There were some key areas for improvement that can help the firm in its financial management systems. This paper intends to discuss about the different things that can be done to counter the deficiencies.   Overview of market efficiency The role of capital markets Integration with the global markets and institutions tends to speed up the reform process to achieve a resilient financial system. Summing up these arguments, it can be concluded that the emerging market economies have benefited from financial liberalization in two ways. The first was by having an increased access to the global pool of capital, which helped to raise the level of investment and output. The second channel of benefit was improvement in the efficiency of capital allocation. Both of these are known to underpin economic growth (Das 2004).  This logic in the international economics literature as well as in the capital market literature is based on the view that market failures and distortions pervade capital markets around the world. Although capital account liberalization is subsumed in financial liberalization, it has been an important issue for the emerging market economies, and deserves to be analyzed as a distinct policy move. In the wake of the recent economic and financial crises in several emerging market economies, capital account liberalization has taken on additional importance. Some of the blame for the recent crises has attached to premature or poorly sequenced liberalization of the capital account (Das 2004).   The capital account is liberalized by removing statutory restrictions on cross-border global capital flows, which in turn is an important facet of general financial liberalization. It entails the relaxation or removal of controls on transactions in the capital and financial accounts of the balance-of-payments. One of the most important removals of restriction is on the convertibility of foreign exchange. The financial markets detect an environment of unsound fundamentals; exchange rate inflexibility at an unsustainable level, or other financial and systemic limitations, the impact is generally pernicious. For market perceptions, perception is reality. A change in market sentiment can lead to the drying up of global financial flows, recession, exchange rate depreciation, and interest rate hikes.  The decade of the 1990s suffered a spate of speculative attacks on emerging markets as well as matured industrial economies (Das 1993).Speculative attacks are squarely based on market perceptions and the presence of imperfections in the global financial markets. The presence of institutional investors in the global financial markets exposed the emerging market economies to further vulnerability. Institutional investors and currency speculators could potentially take substantial short positions in a weak currency. It was observed during the recent emerging market crises that as soon as an inflexible exchange rate and other financial sector weaknesses became apparent in an economy, institutional investors and currency speculators were attracted toward it, making a currency crisis imminent (Das 1993). The capital market is a market where a company and a government can raise funds that will be used in the long term. Some call it the market for securities. In such market money can be lent for longer periods of time. The capital market can be an additional source of fund for Northern Plc. This can reduce some of the financial management system deficiencies by providing alternative sources of income. Such fund will provide backup funds for the company once they mismanage their current funds and budget.    Levels of market efficiency When a financial market is informationally efficient, the current price of a security in the market fully reflects all known information, any new information is rapidly reflected in the security price and new information arrives in the market in a random and unpredictable manner. The concept of financial market efficiency is important because it is the share price at any point in time in the market which is used to measure shareholders’ wealth and the value of the firm. Therefore it is necessary that the share price should be a fair reflection of the firm’s value. This does not imply that the share price, or the price of any other security traded in the markets, will always be perfectly correct but that the market price does at least represent an objective evaluation of the share’s true value. An efficient or competitive market implies that if an investor obtains some new important information about a firm’s future prospects, that investor will act quickly to benefit from this information either by buying or selling the firm’s shares. In a sufficiently competitive market, the firm’s share price will not remain over or undervalued for very long. Other investors will quickly react to take account of any new information which becomes available and either buy or sell the firm’s shares until they believe that its market price is close to its true value (Mcmenamin 1999).    As a result of competitive race between wealth maximizing investors striving to maximize their returns for a given level of risk, the share price will quickly rise or fall to take account of the new information (Shleifer 2000). It is this competition between investors searching for wealth-enhancing investment opportunities which ensure that the market price of a security appropriately reflects its expected future returns and risks and consequently the market value of the firm. In such a competitive market it is not possible for any investor to consistently earn superior returns. The concept of efficiency in financial markets is based on the concept of perfect competition in product markets. For a financial market to be perfectly efficient the following conditions would need to apply:  there are no taxes, transaction costs or other barriers to trading; information is symmetrical, that is, every player in the market has equal and free access to the same information at the same time; there are many players, all of whom are rational, and no single player is able to dominate or influence market prices (Shleifer 2000). Market efficiency can be in a weak form, strong form or semi strong form. In a strong form of market efficiency all information whether they are public or private are reflected in share price and excess returns cannot be earned. In a weak form of efficiency historical data or historical share prices cannot be used as basis for predicting future prices. Excess returns cannot also be earned in the long run even if investment strategies are used. In Semi strong efficiency share prices adjust in an unbiased fashion and it adjust very rapidly in publicly available new information. Semi strong efficiency lets excess returns be earned by trading on publicly available new information. It is a goal for firms like Northern Plc to at least have a semi strong form of efficiency so that it can maintain levels of finances that can be used as another alternative source of income. Gaining a strong efficiency for Northern Plc would help a company boost its value.   Implications for the company’s manager and shareholder A security’s market price at any point in time is a true reflection of its intrinsic value, thus in an efficient market intrinsic value and market value are the same. In an efficient market it is not possible to accurately predict security price movements As security prices already incorporate all past and publicly available information, that is, there is semi-strong from efficiency, then prices will only be affected by new, currently unknown information at some stage in the future if the information was known now it would already be reflected in the security’s current price, it would not be news (Murphy 2000). If future events are uncertain, random and unpredictable then new information will arrive in the markets in an uncertain, random and unpredictable manner. The best estimate of a security’s value is the consensus view of a competitive, efficient market. Thus individual investors performing their own security analysis and trying to beat the market are simply wasting their time. This does not imply, however, that it is similarly a waste of time for investment firms to engage in security analysis. If this activity were to cease then paradoxically markets would no longer be efficient (Murphy 2000). Northern Plc needs to have market efficiency before attempting to correct its financial management system. Once it is efficient enough, the manager can focus on acquiring a strong form of market efficiency and a balanced capital market. The manager should then make sure that all aspects of its financial management system will be adaptable to changes that will be done. The stakeholders should not panic and not do anything that will sabotage the firm’s goal to have an efficient market.    Source of capital available for long term projects Many economic decisions have a time dimension, which can show up in terms of which agent goes first and which goes second in an economic interaction. The sequence of moves can have a profound influence on an outcome. With the recognition that time matters should come; the realization that inter temporal consequences of transactions matter (Sandler 2001). Unquestionably, any explanation of economic growth or economic sustainability must account for the sequence of decisions. But with the insight that time matters should come the recognition that space also matters. Knowledge and insight can guide the allocation of resources, even if most people, including the country's political leaders, do not share that knowledge or do not have the insight to understand what is happening. Clearly this is not true in the kind of economic system where political leaders control economic decisions, for then the limited knowledge and insights of those leaders become decisive barriers to the progress of the whole economy. Economic decisions are ultimately being directed or controlled by those who have specific knowledge in a price-coordinated economy, while those decisions move in the opposite direction from those with less knowledge, who are giving orders to those with more knowledge in a centrally planned economy (Sowell 2000).     A part of economic decision is where to get the capital. One way of getting capital is through capital investments.  Almost all firms recognize that they face major uncertainties about the future, yet most firms' strategic investment decisions are primarily based on a single projection of future events. Although managers do recognize that the failure to include a consideration of uncertainty can lead to costly errors, the difficulty of such planning leads many to ignore the potential costs and hope that serious problems will not arise (Trigeorgis 1995). Suppose a company is considering a strategic decision, such as building a large now plant or embarking on a large research project. Major projects such as these require significant commitments of both capital and managerial attention. The reward from the project depends not only on its technical success, but also on the market conditions and industry structure at the time of completion. Uncertain future developments and the firm's response to these developments can turn such projects into either resounding successes or abysmal failures. However, managers are often baffled by the question of how to include uncertain future outcomes and potential future strategic responses in a prospective analysis of a capital investment project. The actual staging of capital investment as a series of outlays over time creates valuable options to default at any given stage (Trigeorgis 1995). Engaging in investment projects is vital for the growth of the firm.  It serves as way for the firm to gather the capital it needs.  Investment capital is a long term source of capital since it is a process that cannot dwindle immediately and can adapt to changes in the environment. The problem with such kind of source of capital is the level of capital that can be acquired once there is a chance in the environment. Such source of capital is affected by any change in the environment thus the firm will have not acquire any permanent amount of capital that it can use to change its financial management system.   Dividend decision The dividend decision is an integral part of the firm’s strategic financing decision. It essentially involves a firm’s directors deciding how much of the firm’s earnings, after interest and taxes (EAIT), should be distributed to the firm’s ordinary shareholders in return for their investment in the firm, and how much should be retained to finance future growth and development. The objective of the firm’s dividend decision, like all financial decisions, should be the maximization of shareholder wealth (Leuz, Hopwood, & Pfaff 2004). Although how, if at all, the dividend decision affects shareholder wealth is a highly contentious point. If an optimal dividend policy does exist then clearly managers should concern themselves with its determination; if it does not, then any dividend policy will do, as one policy will be equal to another. It should be noted that the dividend decision and dividend policy relate only to ordinary share capital. The payment of preference share dividends is not considered part of a firm’s dividend policy, as the level of, or method of calculating, the preference dividend is fixed in advance by the terms and conditions of the original preference share offer (Leuz, Hopwood, & Pfaff 2004).   Once a dividend policy has been formulated, setting out the amount and timing, etc. of dividend payments, it should be followed with stability and consistency as its guiding principles. In practical terms a firm’s dividend payment is important to its shareholders.  It is part of the return which shareholders receive for their investment in the firm. The dividend payment is also a favored method by which shareholders and investors estimate a firm’s share value, where the value of a share is equal to the present value of the expected future dividend payment (Da Silva, Goergen & Renneboog 2004). Dividend decision is known as the amount and timing of cash given back to the stakeholders. It may influence the firm's stock price and capital structure. It gives an idea of what taxes a stockholder might pay. In most cases the dividend given by the firm is constant for every stockholder. The dividend decision is affected by Free-cash flow; Dividend clienteles and Information signaling. With dividends and decisions related to it the firm can gain higher stock price. As the company’s stock price rises, its value rise and this can be used to gather more clients to gain more income. Dividend can help the firm gather the needed resources to change its financial management system.   Conclusion To change the financial management system, Northern Plc needs to make sure that it has a strong market. It should have capital markets and capital investments that will serve as a source of funding. The firm then need to make the best dividend decision to make sure that thee sources of funding would not be loss. If all these things are working well, the firm can then focus on adjusting the different aspects of its financial management system. It can use the changes to observe how the flow of cash goes within the company, what is the main problem, how it can be solved and will there be any need for the funding for the change in the financial management system. References Das, DK 2004, Financial globalization and the emerging market economies, Routledge, New York.   Das, DK (ed.) 1993, International finance: contemporary issues, Routledge, New York.   Da Silva, L, Goergen, M & Renneboog, L 2004, Dividend policy and corporate governance, Oxford University Press, Oxford.   Droms, WG 1997, Finance and Accounting for Non financial Managers: All the basics you need to know, Perseus Books, Cambridge, MA.   Leuz, C, Hopwood, A & Pfaff, D (eds.) 2004, The economics and politics of accounting: International perspectives on research trends, policy, and practice, Oxford University Press, Oxford.    Mcmenamin, J 1999, Financial management: An introduction, Routledge, London.   Murphy, A 2000, Scientific investment analysis, Quorum Books, Westport, CT.   Sandler, T 2001, Economic concepts for the social sciences, Cambridge University Press, Cambridge, England.   Shleifer, A 2000, Inefficient markets: An introduction to behavioral finance, Oxford University Press, Oxford, England.   Sowell, T 2000, Basic economics: A citizen's guide to the economy, Basic Books, New York.   Trigeorgis, L (ed.) 1995, Real options in capital investment: Models, strategies, and applications, Praeger Publishers, Westport, CT.

Countering the Financial Management Deficiencies of Northern PLC

Introduction Competent financial management is critical to the success and survival of a wide variety of organizations. In the business ...

Managing Financial Resources and Decision

Managing Financial Resources and Decision     The integration and recognition of comprehensive business planning are essential aspects in order to avoid business failure and that, the following discussions are needed to have knowledge on business fundamentals and determine basic foundation of the business to start up with.   Planning and starting a business assumes wisdom, as well as right amount of decision making, as doing business, operating processes and all is not that easy and free flowing, and that to effectively run a certain kind of business, a lot of financial matters will be put into consideration for example, knowing how much business capital will be exposed in order to realize the business?, and such finance sources have to be noted and applies, allowing awareness to fit in from within costs of various finance sources and other related domains. Money is a factor for running a business, without ample flow of money, ideally speaking business will fail its definite purpose and goals, as for instance there is a need for the business to pay their locations in such rentals, pay their employees and other payments deemed relevant for business operations.   a) Identify the sources of finance available to a business. What amount of owner's capital will the business need?   The sources of business finance are of various types, and may depend on the present standing of the overall business and its environment from within financial context. The sources of finance can range from owner’s capital, this means own money invested by the owner as one source of finance capital to keep the business from moving into markets positively. The other sources of finance can be from the banking industry from within there are internal as well as external sources of finance from where there is profit, a profitable business can assume good finance aside, the loan sourcing can be used for the business, as it may came from several banks, as the latter will lend for either short-term or long-term purposes, as there can be an amount lent for example, HK$210,000 for two years, as the bank will charge an consolidating interest on a monthly basis but, if the loan is obtained, then this frees up other capital held by the business, which can then be used for other purposes. The amount of owner’s capital the business needs can depend on the accumulated sources of finance the owner has gathered and collated for operating the business as there can impose to such situations like, in terms of capital accounts for example, for the “existing owners, as contributed based on some cash flow projections that the firm makes simultaneously with the preparation of the annual budget. If business will need total capital of HK$1,000,000 and there already have HK$800,000, then owner capital call can sum to HK$200,000. Indeed, if the individual is a 5 percent owner, the amount capital should be HK $50,000 (5 percent times HK$1,000,000)”. The capital percentages are tied somewhat to income percentages assuming that older partners with enough capital balance could actually receive refunds being paid in tax-free mode, and if amount is not tied up, business might pay interest on capital making finance sources in whole notion.   b) Assess the implications of the different sources. (e.g. What will it do to the business? Sole Pro, Partnership or limited company)   The business will become successful and effective depending on how the flow of money is being handled by the executives and that sources of finance for example, pointing to venture capital, there assumes that capital pooling will outcome into limited companies noting to ‘Venture Capital Companies’ aside, there may look for investment opportunities into high rated business and its prospects, the presence of business angels to keep the business stature as there constantly searching for finance options and have better say in running the business to move forward. The sole proprietorship will strengthen product channelling and supply distribution if bank loans and other forms of debt are being handled properly into business function and stance. For partnership, the source of finance can be supported by a friend or a close family member, into networks of informal investors and can assume connection to ‘business angels’, pertaining to individual who desires to help certain business. There can be positive and negative implications, for positive there maybe easy access to money sources and other funds if need thus, for negative implication, the business could have too many missing links when it comes to financial accounting and assessment and due too over and or under resources, the business will have more losses than profits and will outcome to unrealistic statements and reports.    c) Select appropriate sources of finance for a business project. The appropriate source of finance can account to the theory of raising capital/funds, determining what finance source is best to utilize from within a number of factors, ample cost as important, the using of overdraft can be expensive way of gaining money and the business need to look carefully into the costs for best options. Good combination of internal as well as external sources is appropriate to exercise effective financial planning for the project, recognizing strength of the business finance thus, controlling equity, liquidation as well as such gearing ratio, the business finds out if there is access to the internal sources of finance before borrowing again or enter more loan allowing business to be in tough financial position. d) Assess and compare the costs of different sources of finance.   Every business needs short-term finance from the very beginning to start up the business and to cover day-to-day running costs. This provides the business with working capital. However business also need long-term capital to help them to grow and expand, and this is paid back over a number of years. Without finance a business would find it difficult to accomplish anything, for example someone who decided to start up a shop would need finance at first to just buy the shop and the stock. Business finance rule amiably into such sources as the following: (quoted from, www.bized.co.uk)     Long Term – finance cost can be too high Bank loans and mortgages – suitable for small to medium sized firms where property or some other asset acts as security for the loan Merchant or Investment Banks – act on behalf of clients to organise and underwrite raising finance HK Government – may offer loans in certain circumstances Grants Short Term –the covering of such fluctuations in business cash flows, the finance costs can be in moderate reality Bank loans – necessity of paying interest on the payment, repayment periods from 1 year upwards but generally no longer than 5 or 10 years at most Overdraft facilities – the right to be able to withdraw funds you do not currently have Trade credit – Careful management of trade credit can help ease cash flow Factoring – the sale of debt to a specialist firm who secures payment and charges a commission for the service. Leasing – provides the opportunity to secure the use of capital without ownership ‘Inorganic Growth’ – certain finance cost are high depending on agreements made  Acquisitions and Mergers, firms agree to join together – both may retain some form of identity Takeover, one firm secures control of the other business, the firm taken over may lose its identity   e) Explain the importance of financial planning. Financial planning is not the same as financial advice. It is not a recommendation to purchase a particular product but an evolving action plan, regularly reviewed to ensure that your goals are met. The process involves gathering relevant financial information, setting life goals, examining your current financial status and coming up with a strategy or plan on how you can meet your goals given your current and projected situation. In practice, the strategy will utilise available tax allowances, target liquid assets into appropriate vehicles, ensure your investments are structured correctly and managed professionally. Having created a plan you will be able to understand how each decision you make affects other areas of your finances and you can consider the short and long term effects on your goals. You can also adapt more easily to life changes and feel more secure that your goals are on track. However, the true objective of financial planning is to ensure that this strategy is not neglected and its value is not diminished. Only through regular reviews can you ensure that you remain on track to meet your goals and maximise new ideas and opportunities.   Indeed, objective of financial statements is to provide information about the financial strength, performance and changes in financial position of an enterprise that is useful to a wide range of users in making economic decisions and it should be understandable, relevant, reliable and comparable. Reported assets, liabilities and equity are directly related to an organization's financial position. Financial statements are intended to be understandable by readers who have "a reasonable knowledge of business and economic activities and accounting and who are willing to study the information diligently (in, Ulrich and Stella, 2008). Then, there require financial statements to make important business decisions that affect its continued operations. Financial analysis is then performed on these statements to provide management with a more detailed understanding of the figures as these banks are external users can be outside the business but need financial information about the business for diverse number of reasons. They are financial institutions able to decide whether to grant company with fresh working capital or extend debt securities to finance expansion and other significant expenditures (in, Ulrich and Stella, 2008).   Financial strength was used in describing certain extent to which an entity is constrained by its financial situation in pursuing its strategic goals or policies. An entity is financially strong when it is relatively unconstrained and weak when financial constraints are binding on policy choices. The financial strength of the banks is intimately linked to the successful management of the enterprise. Henceforth, enterprises with a large market capitalization have either been successful at generating earnings in the past and/or are expected to be profitable in the future. Furthermore, what appears to be confusion over micro and macro performance is responsible for a certain lack of general understanding about the importance of the bank financial strength. The financial accounts do provide useful information on the cost of achieving policy outcomes. Indeed they provide information vital to any discussion as to whether the outputs are being attained at least cost (in, Ulrich and Stella, 2008).  The bank deals in financial markets to achieve policy goals, not to maximize its revenues. When the issue of financial strength does arise in business, it is difficult to argue that marginal deterioration in bank’s financial strength would be inimical to macroeconomic performance. Ideally, the financial strength is positively associated with good policy performance. Financially weak institution generates losses which undermine business stability and call into question the credibility of their policies. In assessing banking financial strength careful examination of the policy regime and the volatility of the economic environment is necessary and conventional measures of private enterprise financial strength, profitability and capital can be very misleading when applied to banks (in, Ulrich and Stella, 2008).   f) Describe the information needs of different decision makers. (First you need to identify the decision makers and describe their needs accordingly)   Decision makers will be needing information in order to guide business operation smoothly and have it directed into the right financial status and modification   The following are some noted decision makers and their information needs (business context)   Chief Executive Officer – they need complete and comprehensive financial information and reports, modifying data and explain it presumably, to have correct and accurate copies of financial statements  Business Finance Board – information on business nature and finance matters, how much finance gains there is for the business as well as the looses, projected cash flow, budget for the year  Auditing Division Team – latest accounting standards and principles as well as finance laws and regulations imposed and enacted upon into Hong Kong business operations such as those laws and principles pointing on IAS, the International Accounting Standards, ASB for example, in 1999 Shareholders – information on business standing in global market, data shareholders capital and equity, cash statements as well as balance sheets as requested  Investors – annual financial statements and reports, also projected profit and loss accounts and other finance documents as necessary   g) Describe the impact of finance on the financial statements. In Asia, Hong Kong has the most developed markets in the area of business financing as compared to other Asian countries since, the outlook of Hong Kong is stable, supported by strong liquidity position and the absence of protracted fiscal imbalances within financial institutions. For example, small businesses in Hong Kong as borrowers may have several options for calling into mortgage for example that can be prior to maturation of payment duration and time (in, Chow, Huang and Liu, 2000; Hilliard, Kau and Slawson, 1998) There is the need to understand such terms as discussed below.     The impact of finance on financial statements can be useful into viewing of certain products of specific products allowing good outcomes into the business markets as well as the strengthening of government and or political process and business interactions and market communications, for maximum formation of financial resources. There is impact into economic regulation and public choice as the financial statement offers an explanation for the finance form taken accordingly. Aside, there can also be impact towards accurate and timely financial statement preparation which serves as critical domain for the success or failure of a business. For example, CEO of the business must review the business financial statements and have conforms to the good understanding of them. The visualization impact is viewed from determining finance costs in the areas of  sales, production, accounting and administration. Indeed, timely and accurate financial statements preparation creates confidence, credibility, reliability and business awareness of the owner and senior management in the eyes of bankers and other financial institutions and investors who provide cash and working capital to the business. Bankers and other financial institutions are more apt to provide the necessary cash and working capital when they have confidence the owners and senior management know what's happening in the business. The greater the level of confidence bankers and other financial institutions have in timely and accurate financial statements preparation, the easier and faster it is to obtain the necessary cash and working capital at attractive interest rates, with satisfactory covenants, terms and conditions and the easier it is to increase cash and working capital as the business grows. This is especially valid when the business experiences ups and downs during the various economical cycles of the domestic and worldwide economy. The understanding and analysis of these factors provides financial advisors, owners and management with the ability to anticipate cash and working capital needs before events occur in the business. There is nothing worse to owners and management than to find themselves with inadequate cash and working capital to grow the business and when an opportunity is presented to it. Understanding business financial statements, financial ratios, interrelationships among the various business functions - sales, production, warehousing and inventory control, engineering and accounting - are the keys to a successful business. It enables the business to better budget the future and not find itself in the difficult and sometimes insurmountable situation of having no cash nor working capital to fulfill its objectives and insufficient or no time to explore options to obtain cash and working capital.   Assumptions The impact of finance on financial statement is geared towards spontaneous development of the business, as a graduate of business administration from the University of HK, good finance points and sources recognition is needed to be a part of the process as with presence of positive finance, the financial statement understanding and formation from education context will impose accurate data and figures with tactfulness and true details and if without good finance financial statements are not met accordingly and its information can assume failures of categories and sequence there is.  I am a fresh graduate mastering in business and finance, I have some extra capital to use for business, the business in mind can deal to small kiosks selling variety of products particularly, snack foods like pancakes, doughnuts, waffles and some drinks, the particular business type is being chosen as it does not rely heavily on too much finance source and there needs only enough amount of budget as well as capital and business will be located in school campuses and convenient stores. Indeed, to realize this simple business, to raise money is ideally important can be through business angels, some finance support coming from friends and family. Another option can be through bazaars asking permission to my colleagues to sell some of their personal items in order to raise good capital amount of around HK$25,000. Furthermore, a sole trader will be unable to issue shares and may also face much higher rates of interest on loans as they may be considered a greater risk. The business status does influence the routes that are available to them for raising money.  The business needs to plan ahead carefully to see how long they will need the funds for. The shorter the time period, the more they may be able to reduce the cost of the borrowing. If it is very long-term finance required then they may want to look at debentures or share issues. In the short-term, a simple overdraft may be the most flexible solution.     REFERENCES ASB (1999), Statement of Principles for Financial Reporting, Accounting Standards Board, London Biz/ed (2009), Sources of Finance available at: www.bized.co.uk   Chow, Y.F., Huang, C., Liu, M. (2000), "Valuation of adjustable rate mortgages with automatic stretching maturity", Journal of Banking and Finance, Vol. 24 No.11, pp.1809-29   Hilliard, J.E., Kau, J.B., Slawson, V.C. (1998), "Valuing prepayment and default in a fixed rate mortgage: a bivariate binomial options pricing technique", Journal of Real Estate Economics, Vol. 26 No.3, pp.431-68   Ulrich, K. and Stella, P. (2008), “Central Bank Financial Strength and Policy Performance: An Econometric Evaluation,” forthcoming (Washington: International Monetary Fund)

Managing Financial Resources and Decision

Managing Financial Resources and Decision The integration and recognition of comprehensive business planning are essential asp...