Value of Information Assets Assignment Help

Information has value to its owners, users, automated systems that must use it and government agencies that regulate access to it. For example, Wal-Mart stores could not operate efficiently without a 30 terabyte data warehouse that tracks the cost, profit, shelf-life and other metrics associated with every product sold in every store during the past five years.

Major domestic and international airlines could not efficiently schedule and crew billions of dollars of equipment, not operate their revenue capacity maximization models without the use of sophisticated databases and information systems valued over several billion dollars of replacement cost.

The business model for Visa, MasterCard International and American Express is based around card use data collection, account tracking, fraud analysis, customer billing and receipt collection information for hundreds of millions of credit and charge cards. The collective value of their databases and information assets is in the hundreds of billions of dollars – more than the annual budgets of all the nations of the world, except for the US and Japan.

Wall Street stock trading and financial institutions would not be able to open for business without having confidence in the accuracy of information used to conduct trades, base valuations on, or estimate earnings against. Accurate and trusted information is a core underpinning in market transparency and investor confidence. These are few examples which denote the Value of Information Assets in today's global business scenario.

Information is derived its value by being able to infinitesimally leverage information for financial, operational, analytical, managerial and social advantages. Once collected and verified as accurate, the value of information increases every time a successful transaction or usage occurs due to the cascade effect of each transaction triggering or enabling a second transaction and then a third and so on and so forth over time. The single transaction of selling 100 shares of stock, for example, may trigger purchases of capital goods such as automobiles, trucks, aircraft or property, which over time triggers purchases of other stock, maintenance and servicing of vehicles and property and employment of staff members. When viewed as a complete financial and transaction picture from beginning to end, accurate information enables transaction-based financial gain, marketing leverage, direct customer communications and collaborative partnerships that would be prohibitively costly or complex to establish and support.

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Information Security Process Assignment Help

IT Security is no longer an “event” or part-time assignment for any corporate and government organization. It has become a continuous process every second of every day, from both the technology and management perspectives. Most executives of small companies are unaware that their corporate firewall is probed hundreds of times a day by automated attack tools. Financial services and government firewalls are often probed tens of thousands of times every day.

These attack tools – can be deployed with a few mouse clicks against millions of systems. Once they find an unprotected or poorly protected system, the tools record the IP (Internet Protocol) addresses and other information useful to hackers and crackers in exploiting the system or network for valuable data. Hackers may also turn the system into a denial-of-service (DoS) zombie to flood targeted systems with millions of messages and impair their ability to process and transmit legitimate information.

Attack on such systems can only be countered with the help of a strong Information Security Process which leaves no stone unturned in the same process.

Information Security Process includes a strong security process contains several layers of operational functionality which include

• External and internal access control points such as firewalls
• Strong user authentication for access and downloading
• Audit logging user network, system and information access
• Data encryption processes are applied where possible
• Using trusted partners for data exchange purposes
• Immediate installation of currently available software patches
• Training of internal and external users about passwords controls and unauthorized information access
• Physical security for equipment rooms, software backups and hardcopy documents
• Management policies for unauthorized usage, management monitoring and user privacy expectations
• A root cause analysis process for determining “what happened” when unexpected events occur
• A secure and comprehensive information and service recovery plan that can be immediately triggered should a disaster occur
• Management escalation chains so that small problems are contained quickly and larger problems get resources assigned quickly

These Information Security layers build upon each other in redundant and incremental ways to create a fabric of security. For example, a strong authentication policy can prevent unknown users from gaining access to networks and systems. Known users can log in and perform their work with an audit trail about what they did and when they did it. Data is not only accepted from trusted external sources to prevent contamination of databases with visibly corrupt – worse, semi-valid information.

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Principles of Network Security: An Introduction

Network Security Principles involve around three key principles of Confidentiality, Integrity and Availability. Depending upon the application and context, one of these principles might be more important than the others. For example, a government agency would encrypt an electronically transmitted classified document to prevent an unauthorized person form reading its contents. Thus, confidentiality of the information is paramount. If an individual succeeds in breaking the encryption cipher and then, re-transmits a modified encrypted version, the integrity of the message is compromised. On the other hand, an organization such as Amazon.com would be severely damaged if its network were out of commission for an extended period of time. Thus, availability is a key concern of such e-commerce companies.

Confidentiality

Confidentiality is concerned with preventing unauthorized disclosure of sensitive information. This disclosure could be intentional, such as breaking a cipher and reading the information, or it could be unintentional due to the carelessness or incompetence of individuals handling the information.

Integrity

There are three goals of integrity.

Preventing the modification of information by unauthorized users

Preventing the unauthorized or unintentional modification of information by unauthorized users

Preserving the internal and external consistency

Internal consistency: Ensures that internal data is consistent. For example, in an organizational database, the total number of items owned by an organization must be equal to the sum of the same items shown in the database as being held by each element of the organization.

External Consistency: Ensures that the data stored in the database is consistent with the real world. Relative to the above example, the total number of items physically sitting on the shelf must equal the total number of items indicated by the database.

Availability

Availability assures that a system’s authorized users have timely and uninterrupted access to the information in the system and to the network.

Other important terms include:

Identification: The act of a user professing an identity to the system, such as login ID

Authentication: Verification that the user’s claimed identity is valid, such as through the use of password.

Accountability: Determination of the actions and behavior of a single individual within a system and holding the individual responsible for his/her actions.

Authorization: The privileges allocated to an individual or process that enable access to a computer resource.

These are some of the Network Security Principles which help in formulating the best possible Network Security measures which protect the integrity of a organizational network.

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The Concept of Information Security Principles Management

Information Security Principles and Management is one of the three communities of interest functioning in most organizations. As a part of the management team, the Information Security Principles and Management operates like all other management units by using the common characteristics of leadership and management. In Information Security the goals and objectives differ from those of IT and general management communities in that they are focused on the secure operations of the organization. Because the Information Security principles and management is charged with taking responsibilities for a specialized program, certain characteristics of its management are unique to this community interest.

The extended characteristics of information security are known as the P5 planning, Policy, programs, protection, people and project management.

• Planning: Planning in Information Security management is an extension of the basic planning model. Included in the Information Security planning model are activities necessary to support the design, creation and implementation security strategies with in the IT planning environment.
• Policy: The set of organizational guidelines that have certain behavior within organization is called policy. There are 3 general categories of policy in Information Security. Enterprise information security policy (EISP); Issue Specific Security policy (ISSP); System Specific Policy (SysSp)
• Programs: Programs are operations of Information Security that are specially managed as separate entities. A security education training awareness program is one such entity. SETA program provides critical information to employees to either improve their current level security knowledge.
• Protection: this protection function is executed via through set of risk management activities, risk assessment control, as well as protection, mechanism, technologies and tools. Each of these mechanisms represents some aspect of specific controls in the overall information security plan.
• People: People are the most critical link in the information Security program. It is imperative that managers steadily recognize the crucial role that people play in the Information Security program.
• Project management: The final component of application of thorough project management discipline to all elements of the information security program. Project management involves identifying and controlling the resources applied to the project as well as, measuring progress and adjusting the process as progress is made toward the goal.

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Customer Relationship Management: An Introduction

SCM - Customer Relationship Management

The Customer Relationship Management process provides the structure for how the relationships with customers will be developed and maintained. Management identifies key customers and customer groups to be targeted as part of the firm’s business mission. These deductions are made by the leadership team of the enterprise and the owner of the strategic process is the CEO. The goal is to segment customers based on their value over time and increase customer loyalty of target customers by providing customized products and services. Cross-functional customer teams tailor Product and Service Agreements (PSAs) to meet the needs of key accounts and for segments of other customers. The PSAs specify levels of performance. The teamwork with key customers to improve processes and reduce demand variability and non-value-aided activities.

Customer Relationship management and supplier relationship management provide critical linkages throughout supply chain. For each supplier in the supply chain, the ultimate measure of success of the customer relationship management process is the change in profitability of an individual customer or segment of customers. For each customer, the most comprehensive measure of success for the supplier relationship management process is the impact that a supplier or supplier segment has on the firm’s profitability. The goal is to increase the joint profitability by developing the relationship. The biggest potential roadblock is failure to reach agreement on how to split the gains that are made through joint process improvement efforts. The overall performance of the supply chain is determined by the combined improvement in profitability of all of its members from one year to the next.

While there are a great number of software products that are being marketed as customer relationship management, these technology tools should not be confused with the relationship-focused supply chain management process. Customer relationship management to gather customer data quickly, identify the most valuable customers over time and provide the customized products and services that should increase customer loyalty. When it works, the costs to serve customers can be reduced making it easier to acquire more, similar customers. However, according to Gartner Group, 55% of all customer relationship management projects do not produce results.

There is a wide range of view as to what comprises customer relationship management. At one extreme, it is about the implementation of a specific technology solution and at the other, it is a holistic approach to selectively managing relationships to create shareholder value. It is the former perspective that results in so many failures. In order to develop mutually beneficial business relationships, customer relationship management should be positioned in a broad strategic context and be consistently implemented throughout the organization.

Customer relationship management process has both strategic and operational elements. For this reason, the process has been divided into two parts, the strategic process in which management establishes and strategically manages the process and the operational process in which implementation takes place. Implementation of the strategic process within the firm is a necessary step in integrating the firm with other members of the supply chain and it is at the operational level that the day-to-day activities takes place.

The strategic process is led by a management team that is comprised of executives from several functions: marketing, sales, finance, production, purchasing, logistics and research and development. The team is responsible for making decisions about how relationships with customers will be developed and maintained. At the operational level, there will be a customer team for each key account and for each segment of other customers.

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Performance Management: An Introduction

Cooperation in the supply chain can increase the profitability and also improves the delivery performance and service by reducing the logistics costs. The idea of making profits with the proper implementation of SCM can be traced back to the definition used within logistics. Focus here is on reducing the costs of logistics by, for example, reducing transport, inventory and order processing costs.

A total cost analysis can illustrate how much SCM cooperation can contribute to overall savings, and as a result, why it is a good idea to focus on costs. However, SCM cooperation should not be seen solely as a cost reduction project. Factors such as improved lead time, fewer out-of-stock situations and improved quality can just as well contribute to increased value by positively affecting the volume of sales, increasing value by positively affecting the volume of sales, increasing the price margin, or reducing time to market. These factors can sometimes affect the bottom line result more than simple cost reductions. As a result, there will always be a balancing act between potential revenue and the goal that should be set for supply chain cooperation.

Methods of measurement

Before the objectives, focus areas and goals of cooperation can be articulated, it is necessary for each company to have a clear overview of their own key logistics figure as well as how differing logistical initiatives will affect the company’s totally generated value. Few companies have this total overview before embarking on SCM cooperation.

A good starting point would be to get an overview of the company’s total cost of logistics. The analysis of the total cost of ownership can create a baseline for measuring internal and external performance in terms of logistics.

Total Cost of ownership (TCO) can be calculated in the following manner:

TCO = Purchase price + Transportation costs + Warehouse costs + Transaction costs (Purchase Orders, goods receipt, invoices) + Quality Control/ Claims + Handling of goods + Administration costs/Staff

The disadvantage of using exclusively the TCO analysis as the basis for decision making is that there is a risk of making decisions that optimal from a total cost perspective, but which are not appropriate in relation to the company’s total revenue. This is a possibility because, among other reasons, TCO does not include costs generated by assets other than inventory and accounts receivable.

A model that makes it possible to connect logistic performance with the company’s bottom line result is the Economic Value Adding (EVA) model. This model allows stakeholders focus more on measuring and calculating value creation than on maintaining value. Therefore, cost of capital is also included in the calculations.

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The Concept of Process Orientation in Supply Chain Management

The Supply Chain Management, with its overall perspective on the supply chain, has been difficult for many companies to operationalize. Looking from operational level, the complexity of Supply Chain Management is so vast that it is necessary to break down the supply chain into smaller segments in order to understand it. This does not mean that the overall perspective is thrown aside, but rather that is must be looked at as a way to create a foundation for realizing the vision and perspectives of the supply chain management concept.

Function of Process Orientation

Today, much focus and attention is given to a function-oriented company which is on managing, controlling and measuring the activities bound to a specific function. Budgets, accounts, critical success factors, and award systems are set for each functional area. Each department is driven by a budget, which it must fulfill for a given period. When a department has reached its budget target, whether it is based on costs, resources, earnings, it has performed well and will be rewarded.

A line manager usually manages each of his/her function without any interference. Attempts to work across a function-oriented company will lead to resistance from managers guarding their territory, who do not want to empower or leave decisions to others within the organization. The worse case scenario, in the eyes of these managers, would be having control or decision making powers lying in the hands of the companies external to the organization.

The division of a company according to functions does have its advantages when the aim is to exploit specialized knowledge and experience within different areas. There may be disadvantages, however, if the aim is to gain an overall understanding of the company and develop a process orientation. There is a strong risk that each department will sub-optimize from the perspective of the company as a whole.

The built-in conflicts and opposing targets are well known in most companies. They are very hard to avoid in the daily life of the company. The risk of sub-optimization similarly increases its own internal business processes only, rather than looking at the supply chain as a whole.

A number of companies have realized the need to change their vertical organization structure to a more historical structure. This change draws attention to process, as opposed to looking at the functional barriers and the different steps of the supply chain. Setting up working process management is a major challenge for management, as it requires the ability to predict organizational changes and to establish new management forms, decision-making methods, tasks and award systems.

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Keynesian Model In Economics: An Introduction

Keynesian Model In Economics has gained a very important place. It is regarded as one of the basic models of modern Economics as we know it.

According to the Keynesian Model In Economics, Consumption is the spending on consumer goods over a given period, usually a year. Consumer goods are goods and services that are consumed or used up within the year, such as food or electricity. In practice, however, many goods counted as consumption goods last longer than a year such as dresses, cars and toasters, etc.

John Maynard Keynes made two key assumptions about what determines consumption spending.

• Assumption 1: People base their consumption spending mainly on their current take-home pay, i.e., on disposable income or DI.
• Assumption 2: When people get additional income, they do not spend it all.

Keynesian Consumption Function shows the level of consumption at different levels of disposable income, holding constant the other determinants of consumption. In Keynesian Consumption Function, consumption goes up as the disposable income goes up but not all of the additional income is consumed.

The Keynesian Consumption Function

Disposable Income (DI)	Consumption (C)	Savings (S)
$ 3000	$ 3400	- $ 400
4000	4200	- 200
5000	5000	0
6000	5800	200
7000	6600	400
8000	7400	600
9000	8200	800
10000	9000	1000

Savings is unconsumed income (disposable income minus consumption). At the “break-even” income of $5000, savings are zero. Below, $5000, there is dissaving (or negative savings). To dissave – to consume more than is earned – people can borrow money or draw down their bank accounts. Above $5000, savings are positive. Every $1000 added to income adds $200 to savings. The marginal propensity to save (MPS) is the added savings divided by the disposable income that caused savings to go up. Here MPS = 0.2 = ($200/$1000)

Since every added dollar of income is consumed or saved, we have:

MPC + MPS = 1

Note that the average propensity to consume (APC), which is consumption divided by disposable income, does not have to equal the MPC. At DI = $10000, for example, C/Di = 0.9 while MPC = 0.8.

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Our other articles on Economics include Labor Economics, Inflation, Demand for Money, Balance of Payments and Balance of Payment (contd)

The Concept of Recessions In Economics

In Economics, Recessions can be found in business cycles. Business cycles are the total ups and downs of an entire nation or possibly the entire world from time to time, over a period of more than 10 years. Recession in Economics is considered to be a decline in economic activity.

An economy operating at its potential level is said to be at full employment. At full employment, some unemployment occurs. This is consistent with the shifting of workers between jobs due to changing tastes and technology.

A recession occurs when GDP falls significantly below its full employment level. The Department of Commerce defines a recession as when real GDP declines for two consecutive quarters.

Two types of recessions occur. First, output can fall if the economy is operating at below its potential (full employment) level. Second, output can fall if the economy’s potential level of output falls.

The first type of recession occurs when output falls significantly below its full-employment level in a recession. Unemployment grows as a large number of workers cannot find work. The most dramatic recession of this type was the Great Depression, where 25 percent of the workforce was unemployed and real output fell more than 30 percent. This type of recession usually occurs when consumers and investors reduce their aggregate spending.

The second type of recession occurs when the economy’s potential output falls. For example, a nation that passed a minimum wage of $2000 will likely experience massive unemployment and a recession. Its potential output has decreased. As another example, a decline in efficiency or a decline in technological progress could cause output to fall. Even if unemployment rises, the economy may still be fully employed in the sense that employers are fully hiring all workers they can.

The difference between a decline due to full-employment output falling below its full-employment level and a decline due to full-employment output falling is crucial. The first type of decline fits recessions described by Keynesian and monetary economists, each giving different reasons for the decline in spending. The second type fits recessions described by rational expectations economists, who give different reasons for the decline in full-employment output.

Why Recessions occur

Two startling facts exist about modern capitalistic economies. The first is that they have recessions. The second is that most of the time they are not in recessions. This suggests that some cause occasionally derails the economy. Yet, over time, the economy rebounds to full employment. But how can an economy recover? The explanations are given below.

Monetary Economists: This school of classical economists observes that sudden and large decreases in the money supply or decreases in the rate of monetary growth usually precede recessions. While the economy naturally tends to be fully employed, sudden unexpected declines in the money supply will decrease total spending, decreasing the economy until people and prices can adjust to having less cash.

Keynesian Economists: John Maynard Keynes emphasized the importance of total spending and the components of total spending (consumption, investment, government spending and net exports). In particular, he felt that when people reduced consumption spending to save more, financial markets in times of uncertainty would be unwilling to spend the new savings on investments. The result would be a decrease in total spending. Keynes also believed that prices are sticky – resistant to changes. The mix of less spending and fixed prices means lower output and a recession. Keynesian today put a similar emphasis on total spending and the rigidity of prices for explaining the business cycles.

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Our other articles on Economics include Labor Economics, Inflation, Demand for Money, Balance of Payments and Balance of Payment (contd)

Product Design in Operations Management: An Overview

Product Design is one of the crucial stages in Operations Management. The design of a product or a service is one of the most important steps. This will definitely affect the earnings from the product. The basic limiting characteristics of the production system design are set during the Product Design phase. In designing the product, or the item to be processed in non-manufacturing systems, the product designer specifies materials, tolerances, basic configurations, methods of joining parts and the like, and through these specifications sets the minimum possible production cost. The conscious effort to design for low manufacturing cost is often referred to as production design. Given the product design, process planning for manufacture must be carried out to specify the process required and the sequence of the processes.

The two basic steps in designing a product are functional design and production design

Functional Design

In the functional design step the product is designed to be functional. Decisions are made on dimensions, materials to be used, type of final finish required for appearance and so on. At this stage, the designer is more concerned with the product itself than the methods of production. The main concerns are functional considerations, customer appeal, cost and ease of operation and maintenance.

Production Design

In the production design stage, the designer considers introduction of modifications and new concepts into the product to make it more suitable for production. Some of the concepts employed in this stage include:

Standardization: The designer can facilitate the production of the part by standardization of a port or the whole product. Standardization can also cut production costs by eliminating the need for planning for several different product varieties. It allows firms to work larger and often economical, quantities of fewer items. However, standardization has limitations such as forestalling improvements and fewer options for customers.

Modular Design: Modular Designs facilitate production and maintenance. This type of design is used extensively in computers. Products are made easily detachable subassemblies or sections.

Simplification: Sometimes the designer may include some features in the design that, although not very critical to function of the product, create severe problems in the production stage. To correct these situations, sometimes some part of the design must be simplified.

Once developed, many products also undergo value analysis (value engineering). This is an attempt to see if any materials or parts can be substituted or redesigned in such a way as to continue to perform the desired or intended function, but at a lower cost.

The nature of product design can affect costs in a wide variety of cost categories, going far beyond the direct labor and material costs involved. A list of categories affected by product design include:

• Raw material
• Equipment
• Direct Labor
• Indirect labor
• Tooling
• Engineering
• Sales and administration

Many of the indirect costs tend to be hidden. For example, the number of individual parts in a design can drastically, affect the indirect costs due to greater paperwork and the greater cost of ordering, storing and controlling the larger number of parts. Thus, the selection of product design must reflect consideration of all the foregoing factors.

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Our other articles on Operations Management include Lean Manufacturing, Just-in-Time, Inventory Management, ABC Analysis

The Concept of Facility Location In Operations Management

In company’s strategy formulation, the type of goods and services it shall offer, the markets in which it will compete will be determined. Demand forecasts are made to estimate the demand for a particular product in various markets. In this regard the company’s strategy will also include selecting the facility location from which potential markets will be served. The facility location of a service operation will help determine how conveniently customers can conduct business with the company.

Facility Location for production and service operations can have a great impact on investment and operating costs, thereby affecting profits and perhaps the price at which goods or services can be offered, as well as some aspects of the production system design. Even though facility location is a factor of importance, ordinarily many alternative locations can be equally good. Normally plant location is considered or reconsidered consciously only periodically, but in some sense broad alternatives are considered whenever an expansion or contraction is necessary.

Factors in location

Rational decisions concerning plant location are intended to minimize relevant costs. Normally, however, we are thinking of not only operating costs but also costs in the long term. Thus, differences in operating cost might be compensated for in the long term by differences in capital investment.

A wide variety of subjective factors can influence location decisions. Therefore, it is common to rate alternative locations on such subjective factors as

• Labor supply
• Type of labor
• Labor union activity
• Community attitude
• Appearance
• Transportation
• Availability of utilities
• Recreational facilities

Even though these factors are subjective, a thought should be given to the long term costs in attempting to rate alternative locations on the basis of these dimensions. Thus, a tight labor supply or heightened union activity could mean higher labor costs in the future. A community attitude oriented against industry could mean a future tax loading on intruding business.

Site Location

Given a general area of location, a site within the area must then be chosen. The following requirements must be met:

• A site zoned for the activity contemplated.
• A site large enough to accommodate present floor plan needs and room for expansion, parking, transportation facilities and the like. Normally, a site size five times the actual plant area is regarded as the minimum.
• A provision for necessary transportation facilities, utilities and waste disposal.
• A soil structure that can carry the required bearing foundation loads.

Alternative sites also need to be studied from the point of view of the relocation of investment versus operating cost effects. The concept of break-even analysis can be used to compare various sites on the basis of total costs relative to the volume of operation. Thus, a site that may require large capital expenditure but that makes possible low operating costs may be a more economical site than one that has the reverse cost characteristics.

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Our other articles in Operations Management include Transportation Models, Process Oriented Layout, Lean Manufacturing, Manufacturing Innovation

Understanding Financial statement Analysis

The basic limitation of traditional approach to financial statements comprising balance sheet and the profit and loss account is that they do not give all the information related to the financial operations of a firm. Nevertheless, they provide some extremely useful information to the extent that the balance sheet mirrors the financial position on a particular date in terms of the structure of assets, liabilities and owners’ equity and so on and the profit and loss account shows the results of operations during a certain period of time in terms of the revenues obtained and the cost incurred during the year. Thus, the financial statements provide a summarized view of the financial position and operations of a firm. Therefore, much can be learnt about a firm from a careful examination of its financial statements as invaluable documents/performance reports. The analysis of financial statements is, thus, an important aid to financial analysis.

The focus of financial statement analysis is on key figures in the financial statements and the significant relationship that exists between them. The analysis of financial statements is a process of evaluating the relationship between component parts of financial statements to obtain a better understanding of the firm’s position and performance.

The first task of the financial analyst is to select the information relevant to the decision under consideration from the total information contained in the financial statements.

The second step is to arrange the information in a way to highlight significant relationships.

The final step is interpretation and drawing of inferences and conclusions. In brief, financial analysis is the process of selection, relation and evaluation.

Ratio Analysis:

Ratio Analysis is a widely used tool of financial analysis. It can be used to compare the risk and return relationships of firms of different sizes. It is defined as a systematic use of ratio to interpret the financial statements so that the strengths and weaknesses of a firm as well as its historical performance and current financial condition can be determined. The term ratio refers to the numerical or quantitative relationship between two items/ variables. This relationship can be expressed as percentages, say net profits are 25 percent of sales assuming net profits of $25000 and sales of $100000.

Fraction (net profit is one-fourth of sales) and Proportion of numbers (the relationship between net profits and sales is 1:4). These alternative methods of expressing items which are related to each other are, for purposes of financial analysis, referred to as ratio analysis.

The rationale of ratio analysis lies in the fact that it makes related information comparable. A single figure by itself has no meaning but when expressed in terms of a related figure, it yields significant information.

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Our other articles on Finance include Present Value, Net Present Value, Internal Rate of Return, Present Value Annuity, Private Equity & Venture Capital

Working Capital Management in Finance

In Finance, Working Capital policy involves decisions about a company’s current assets and current liabilities – what they consist of, how they are used and how their mix affects the risk versus return characteristics of a company. Both the terms working capital and net working capital normally denote the difference between a company’s current assets and current liabilities. The two terms are often used interchangeably.

Working capital policies, through their effect on the firm’s expected future returns and the risk associated with these returns, ultimately have an impact on shareholders’ wealth. Effective working capital policies are crucial to a firm’s long-run growth and survival. For example, a company lacks the working capital needed to expand production and sales, it may lose revenues and profits. Working capital is used by firms to maintain liquidity that is the ability to meet their cash obligations as they come due. Otherwise, it may incur the costs associated with a deteriorating credit rating, a potential forced liquidation of assets, and possible bankruptcy.

Working capital management is a continuing process that involves a number of day-to-day operations and decisions that determine the following:

• The firm’s level of current assets
• The proportions of short-term and long-term debt the firm will use to finance its assets
• The level of investment in each type of current assets
• The specific sources and mix of short-term credit (current liabilities) and the firm should employ

Working capital differs from fixed capital in terms of the time required to recover the investment in a given asset. In the case of fixed capital or long term assets such as land, buildings and equipment, a company usually needs several years or more to recover the initial investment. In contrast, working capital is turned over or circulated, at a relatively rapid rate. Investments in inventories and accounts receivable are usually recovered during a firm’s normal operating cycle, when inventories are sold and receivables are collected.

Importance of working capital

A company needs working capital to operate and survive. In many industries, working capital constitutes a relatively large percentage of total assets. In the manufacturing sector, for example, current assets comprise about 40 percent of the total assets of all US manufacturing corporations. Among the wholesaling and retailing sectors, the percentages are even higher – in the 50 to 60 percent range.

A firm’s net working capital position is not only important from an internal standpoint; it is also widely used as one measure of the firm’s risk. Risk deals with the probability that a firm will encounter financial difficulties, such as the inability to pay bills on time. All other things being equal, the more net working capital a firm has, the more likely it is able to meet current financial obligations. Because net working capital is one measure of risk, a company’s net working capital position affects its ability to obtain debt financing. Many loan agreements with commercial banks and other lending institutions contain a provision requiring the firm to maintain a minimum working capital.

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Our other articles on Finance include Present Value, Net Present Value, Internal Rate of Return, Present Value Annuity, Private Equity & Venture Capital

Capital Budgeting in Finance

When a company invests in a new asset, the asset usually appears on the balance sheet rather than being immediately charged against income as an expense. The asset is then charged against income through depreciation expense over its estimated useful life. This expense is supposed to match the timing of the income generated by the asset because there are often differences between depreciation for tax and accounting purposes, it may be necessary to create a liability account for deferred taxes if the tax depreciation is greater than the financial accounting depreciation.

Although the income statement provides some indication of the profitability of the business, it provides little indication of the true return on invested capital or whether a particular capital investment is worthwhile. A project may provide a positive return but the return may be too small to justify the investment. The return on capital invested must be measured on a cash-flow basis and take time into account. That is the purpose of capital investment analysis, also called capital budgeting.

Capital Budgeting in Finance involves the analysis of project proposals and the ranking and selection of those projects suitable for investment. It is an integral part of a company’s strategic-planning process. Capital Budgeting is a process of analyzing expected cash flows and expected risks in a disciplined, quantitative way against a backdrop of overall corporate strategy.

For a company of any size, an overriding concern of management is to increase the owners’ value. To do so requires investing in projects that return more than the cost of capital. Capital budgeting deals with the asset side of the balance sheet. It is concerned with what investments should be made, not how the projects are financed. Inevitably, those two decisions overlap in the minds of a company’s CFO and treasurer. A simple comparison of the next project to the next financing can be misleading, however, particularly if that financing includes debt with tax-deductible interest payments. The CFO should take a broad look at all the company’s investment opportunities and all of its capital sources, including both debt and equity, when making capital investment decisions.

Capital budgeting in Finance requires assumptions about the future. To decide how a proposed project compares with other investment opportunities and to identify risks and pitfalls, one should ask for the insights of thoughtful individuals from different departments and different professional experience. In addition to sharing their views on whether a project should be a strategic priority, these individuals may review items in the project proposal, such as raw material costs, labor costs, the market for the product to be produced, when the product will become obsolete, price points, competition and terminal value of the capital assets.

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Our other articles on Finance include Present Value, Net Present Value, Internal Rate of Return, Present Value Annuity, Private Equity & Venture Capital

Capital Structure in Finance: An Overview

Capital Structure in Finance plays an important role. The concept of Capital Structure defines the percent of equity and debt in long term liabilities in the balance sheet. To support its investments, a firm or a company must find the means to finance them. Equity and debt represent the two broad sources of finance for a business firm. Equity consists of equity capital, retained earnings and preference capital. Debt consists of term loans, debentures and short-term borrowings.

Some of the types of long-term finance options that are available are:

Equity Capital: Equity Capital is one of the basic types of finance. Equity capital is issued in the primary market to general public. The general public will buy the shares and will contribute to the equity capital. These shares can be sold by the owners in the secondary market or a stock exchange. Equity shareholders are the rightful owners of the company.

Internal Accruals: Internal Accruals of a firm consist of depreciation charges and retained earnings. Depreciation represents the allocation of capital expenditure to various periods over which the capital expenditure is expected to benefit the firm. Retained earnings are that portion of equity earnings (profit after tax less preference dividends) which are ploughed back in the firm. Nearly 30 to 80 percent of profit after tax is retained for financing growth.

Preference Capital: Preference Capital represents a hybrid form of financing – it partakes some characteristics of equity and some attributes of debentures. It resembles equity in the following ways: Preference dividend is payable only out of distributable profits. Preference dividend is not an obligatory payment. Preference dividend is not a tax-deductable payment.

Preference capital is similar to debentures in several ways. The dividend rate of preference capital is fixed. The claim of preference shareholders is prior to the claim of equity shareholders. Preference shareholders do not normally enjoy the right to vote.

Term Loans: Term loans come under the category of long-term debt. Firms obtain loans given by financial institutions and banks have been the primary source of long-term debt for private firms and most public firms. Term loans are also referred to as term finance, represent a source of debt finance which is generally repayable in less than 10 years. Long term finance is used to acquire fixed assets such as machinery, buildings, etc.

Debentures: Debentures are an alternative to term loans. Debentures act like negotiable instruments in one way. Debenture holders are the creditors for the company. The company is the debtor for the debenture holders. There is an obligation for the company to pay Interest every year to these debenture holders. The amount of interest is limited and the time period for the debentures to mature is also limited.

The key differences between equity and debt are:

• Debt investors are entitled to a contractual set of cash flows, where as equity investors have a claim on the residual cash flows of the firm, after it has satisfied all other claims and liabilities.
• Interest paid to debt investors represents a tax-deductible expense, whereas dividend paid to equity investors has to come out of profit after tax.
• Debt has a fixed maturity, whereas equity ordinarily has an infinite life.
• Equity investors enjoy the prerogative to control the affairs of the firm, where as debt investors play a passive role – of course, they often impose certain restrictions on the way the firm is run to protect their interests.

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Our other articles on Finance include Present Value, Net Present Value, Internal Rate of Return, Present Value Annuity, Private Equity & Venture Capital

Monopolistic Competition Assignment Help

Monopolistic competition has four distinctive characteristics. There is a very large number of firms. Each firm’s product is slightly differentiated from those of its competitors. Firms are free to enter or to exit the industry. Firms engage in non-price competition such as advertising.

Monopolistic competition is a market structure in which there are many sellers of a commodity, but the product of each seller differs from that of the other sellers in one respect or the other. Thus product differentiation is the characteristic feature of monopolistic competition. This product differentiation manifests itself in several ways, for example, different brands of the product, different trade marks, difference in shape, color and quality. It can also be in the form of difference in services and facilities offered to the consumers by the sellers.

Some of the features of Monopolistic Competition include

A large number of firms

There are many firms in a monopolistically competitive industry, but not as many as in a perfectly competitive industry. Thus no firm is large enough to dominate the market. Monopolistically competitive markets include hair-dressers, pharmacies and restaurants in a typical large city.

Product differentiation

Each firm’s product in a monopolistically competitive market is slightly different from those of other firms, in terms of product characteristics, service, packaging and advertising. Product differentiation is perhaps the factor that distinguishes this market most from perfect competition. Under perfect competition, where products are homogenous, each firm faces a horizontal demand curve, indicating that each firm’s product is a perfect substitute for that of every other firm.

Freedom of entry or exit of firms

As in case of perfect competition, firms are free to enter and to exit the market anytime under monopolistic competition. The entry or exit of a firm will not change the number of products that are being produced annually. If a firm leaves the industry, the market share of that firm will be equally or proportionately distributed among the rest of the firms, striking a balance between the demand and the supply.

Selling costs

Each firm spends a lot of money in the form of advertisement and publicity of its products. With a view to selling more and more units of the product it gives wide publicity of its products in newspapers, cinemas, journals, TV, internet, etc. These expenses are called selling expenses.

Price control

Each firm in a monopolistic competition has a limited control on the price of its product. Average and marginal revenue curves of a firm under monopolistic competition slope downwards as in case of monopoly. It means that if a firm wants to sell more units of its product it will have to lower the price per unit.

Limited mobility

Under monopolistic competition neither the factors of production nor goods and services are perfectly mobile.

Imperfect knowledge

Buyers and sellers lack perfect knowledge about the price of the product because it is not possible to compare the products of different firms due to the product differentiation.

Non-price competition

Another feature of monopolistic competition is that different firms may cooperate with one another without changing the price of the product. Instead the competition is observed in the type of advertisements about the product. A very good advertisement can generate a good response for the product.

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Our other articles on Economics include Labor Economics, Inflation, Demand for Money, Balance of Payments and Balance of Payment (contd)