FIN200 Corporate Financial Management - Bachelor of Accounting
Added on 2019-10-31
12 Pages2750 Words290 Views
CORPORATE FINANCEBACHELOR OF ACCOUNTINGINSTITUTIONAL AFFILIATION(S)STUDENT NAME[Pick the date]
CORPORATE FINANCEINTRODUCTIONIn today’s management system of organisations, capital budgeting plays an important part as all long term risks in investments and expenditures can be calculated by applying different techniques and analysis[ CITATION Cre12 \l 1033 ]. By making a proper planning and evaluation, overall costs of operations in company are reduced and avoids under or over investments. Capital budgeting provides an essential tool for the management and gives a wide scope for managers to make analysis of project costs and their significance for the company. There are several techniques which are considered by managers while making capital budgeting for the company[ CITATION Edu17 \l 1033 ]. Some of the traditional and modern ways those are followed while budgeting are shown in the following figure. Figure: Techniques for Capital budgetingSource: [ CITATION San16 \l 1033 ]Capital budgeting techniques is essential tool while making analysis of larger projects. Some limitations have been identified by researchers while following traditional methods and to manipulate unfavourable projects, superior tools are required. While evaluating projects, evaluators may arise to ask questions relating cash outflows following payback dates and time required to recover those cash flows or what shall be the NPV after calculating discount rates. Thus well improved and related evaluation techniques has to be considered to make 2
CORPORATE FINANCEappropriate assumptions like Sensitivity analysis, scenario analysis, simulation techniques and break-down analysis. These are few modern techniques which are used by the financial management of today’s business and to understand these tools, a detailed research have been made in this paper to provide assistance to managers while preparing capital budgets for the company[ CITATION How17 \l 1033 ]. SENSITIVITY ANALYSISSensitivity analysis is one of the management tools that are used to analyse organisations scenarios to evaluate crucial and non crucial variables on the net profits of the company. Sensitivity analysis is also used by management while decision making to ascertain possible relationship between components of proposed venture’s involvement in profitability, liquidityand working capital of the company. To determine the receptiveness of net present value (NPV) to variables those are utilised for calculating it is the main task of sensitivity analysis along with measuring risks. This is due to the process of evaluating investment prospects using NPV is supported by assumptions based on forecasting, therefore making it tentative. Sensitivity analysis can also measure the changes in variables and assumptions that can bear force on bottom lining of cash flow and profiteering of venture. Managers can have an idea about venture’s success for the business while evaluating the assurance of resources for new project. Some professionals also assumes sensitivity analysis as risk assessment tool and claims that since this method is based on assumptions, ambiguity into investments is probablewhile incorporating this tool in decision making[ CITATION Dav17 \l 1033 ]. Sensitivity analysis carries simple features and uncomplicated theory unlike other accounting theories where there is a need for detailed study. This theory identifies crucial areas while attaining organisational goals as stated in vision of the company statement and thus helps managements in concentrating while discharging duties to the employees. It also helps in 3
CORPORATE FINANCEidentifying susceptible areas which can be directly scrutinized. The data processed while making analysis can enable professional judgement while allocating managerial responsibilities. Sensitivity analysis software’s that are available in the market can perform calculations in simpler and fast manner by putting in the variables and getting results that can help in making quick decisions. Thus by evaluating future results, the management can give attention in implementing eminence control to determine the success in their investment on ventures. The weakness sensitivity analysis contains is that it is not fundamental in nature as it judges only changes made in variables. Taking into account the possibility of changes in variables are not made in analysis. Thus sensitivity analysis alone cannot judge and make final decisions in budgeting and provides only the information’s that can be interpreted in further analysis[ CITATION Chi13 \l 1033 ]. BREAK-EVEN ANALYSISBreak-Even analysis is one another important tool used by managers to evaluate economic viability of new venture. The point in which profits are equal to costs is called the breakeven point and at that time no profit or loss is assumed. It can also be interpreted in sales i.e. break even sales unit required to cover overall costs. Sales which are found below cost levels are resulted losses and sales above cost levels are deemed profits made by company. Not always breakeven point is determined in producing products to cross sales level but sometimes certain profit returns are desired in investments. If it is not realised then selling substantial amount of products may result in assuming loss for the company[ CITATION Rob98 \l 1033 ]. Thus breakeven can prove an effective tool in making decisions regarding quantity of goods to be produced in new venture to gain revenue. Fixed costs and variable costs are utilised in making break-even analysis in which fixed costs are those overhead costs those areinvariable and does not change even if there is a change in output level. Variable costs are opposite in nature and changes with level of outputs and are inconstant and frequently settled 4
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