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Financial modelling is a process of creating company’s financial performances in a spread sheet or excel sheet. It is created based on historical performances and assumptions about future. Various numerical models and theories will be used by the financial analyst to forecast the future earnings of the company.Objectives of financial modelling are as follows −Valuing a business.Raising capital.Growing the business.Acquisition.Selling/divesting assets and business unit.Capital allocation.Budget and forecasting.Types of financial modelling are given below −Three statement model − Income statement, balance sheet and cash flow are called three statements. All the related formulas are linked in excel to create a financial ... Read More
Non-financial performances have great impact on non – tangibles of a firm. Many of these performances will not focus on the money generation, but they will have positive impact on finances related to business organisations.Some of them are explained below −Developments of new services/productsResearch and development goals will help goals of innovation, new product creation or improvements in existing products.Customer serviceFinding new ways to expand customer service by new way will yield customer appreciation, through which it will result in customer retention or addition of new customers.Training programsEmployee training programs helps in work performances, which creates effective and motivated staff. ... Read More
Organisations need different set of objectives, to attain their success. These objectives give a plan or directions to the organisation to meet their long term goal.Some of the objectives are explained below −RevenueRevenue generation is the main objective of an organisation. It plays an important role in project life cycle. Revenue generation helps an organisation to plan its marketing and other necessary things in the business.MarginsAfter all sales and expenses, money left after is called profit. Profit plays an important role in business cycle as they generate money for next projects and developments of business.Operational activitiesOperational activities keep business running. ... Read More
William Sharpe, a financial economist developed Capital asset pricing, model in 1970. According to his book, “portfolio theory and capital markets”, he defined risk as systematic risk and unsystematic risk.Systematic risk is related to interest rates, recessions etc., where perils of investing can’t be diversified. Whereas, unsystematic risk is related to stocks.Capital Asset pricing model states relationship between systematic risks and expected returns. It based on mean variation concept. Formula is as follows −$$R_{a}=R_{rf}+\beta_{a}\ast(R_{m}-R_{rf})$$$R_{a}= expected\:return\:on\:a\:security, R_{rf}= risk\:free\:rate, R_{m}=expected\:return\:of\:the\:market$$$\beta_{a}=the\:beta\:of\:the\:security, (R_{m}-R_{rf})=equity\:market\:premium$$Assumptions are mentioned below −Preference of investors for risk return.Investors’ expectations of risk and return.Depending on their assessments of risk and return, ... Read More
Financial strategy tells about how to gather funds and how to utilise the funds. The main purpose is adequate supply of funds to meet present and future needs of business activities. The main aim is to maximise financial value of a firm.Evaluating financial performances − Firm financial performances can be measured by analysing financial ratios of the firm.Financial forecasting − By analysing financial needs, funds will be allocated accordingly. By using scientific techniques accurate forecasts are made, which provides basis to strategic decisions.Capital structure planning − Capital structure decisions will be made on reasonable debt and equity capital. Capital structure ... Read More
There are 3 types of accountsReal account − It relates assets and liabilities; it does not include people accounts. They carry forword every year.Personal account − Connects individuals, firms and associations accounts.Nominal account − Relates all income, expenses, losses and gains accounts.Golden rules of accountingDebit the receiver, credit the giverIf a person gives something to a firm, it must be recorded as credit in the books of accounts. It is used as in personal accounts.If anything coming then Debit, if anything goes out then credit.Real accounts consist of machinery, land and building etc. debit what comes in means it will ... Read More
ADR means American Depository Receipt. ADR is a certificate issued by an American Bank which states that number of shares of another country firm can be traded in U.S. markets. JPMorgan a British departmental store created first ADR in 1927. According to Securities and Exchange Commission (SEC), instead of foreign stock, ADR is more convenient because they have more protection and transparency.ADR Process includes −Domestic company already in local stock exchange sell the shares in bulk to U.S. bank and listed on U.S. exchange.After bank accepts the shares it will issue ADR to interested investor.Selling of ADR shares will be ... Read More
GDR stands for Global Depository Receipts. It is an instrument in which a company in one country issues its shares or convertible bonds in another country. It is a depository receipt, where the security certificate is issued by financial intermediaries (like depository bank), purchases the security and then creates bank certificate and finally selling them in the stock exchange.Some of Indian companies who have GDRs are −Bombay DyeingAxis BankHDFCIndia bulls housing etc.Mechanism of GDR is explained below −If a firm make an agreement with overseas depository bank for purpose of issue of GDR. Then depository bank makes a custodian agreement ... Read More
Source of finance can be simply explained as follows −Based on timeLONG TERMMEDIUM TERMSHORT TERMBASED ON TIMEEquity sharesPreference sharesTrade creditPreference sharesDebenture/BondsWC loansInternal accrualsfinancial institutesgovernmentcommercial banksFixed deposits (period of 1 year)Debentures/bondsAdvances from customersTerm loansCreditorsVenture fundinglease financePayablesAsset securitizationHire purchase financeFactoring servicesInternational financeBill discountingBased on ownership and controlOwnedBorrowedBased on ownership and controlEquity capitalLoans fromFinancial institutionsCommercial loansPreference capitalRetained earningsConvertible debenturesDebenturesVenture fund/ private equityBased on source generationInternalExternalBased on source generationEquity capitalRetained profitsPreference capitalReduction in working capitalRetained earningsSale of assetsConvertible debenturesVenture fund/private equity
The term breakeven point in terms of accounting is nothing but, in a particular accounting period the firm revenues is exactly as same as expenses. This is denoted as BEP (Break Even Point). It tells about number of units to be sold to meet the expenses. It also helps in calculating zero operating margin.Formula − (total fixed cost/price per unit) - variable costFinancial breakeven point is a point where earnings before income tax (EBIT) is equal to financial cost of a firm (or) earnings per share (EPS) is equal to zero. It is useful in calculating zero net income. It ... Read More