| training100.ru http://training100.ru Financial Management Concepts in Layman's Terms Thu, 10 Aug 2017 08:26:56 +0000 en-US hourly 1 /> 120235918 Specialized Factoring | training100.ru http://training100.ru/sources-of-finance/specialized-factoring http://training100.ru/sources-of-finance/specialized-factoring#respond Thu, 10 Aug 2017 08:26:56 +0000 http://training100.ru/?p=4981 When a business organization sells its accounts receivables to a third party called factor for a commission or fees in return, it is termed as factoring. It is a type of finance to support the short-term liquidity needs of the business. The concept of factoring is widely popular among the business organizations and its services have entered in different sectors of the industry. Factoring services in different industries are termed as specialized factoring. Specialized Factoring With the expansion of business and its needs, the factors have widened their area of service to sectors where they were not present earlier. The

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When a business organization sells its accounts receivables to a third party called factor for a commission or fees in return, it is termed as factoring. It is a type of finance to support the short-term liquidity needs of the business.

The concept of factoring is widely popular among the business organizations and its services have entered in different sectors of the industry. Factoring services in different industries are termed as specialized factoring.

Specialized Factoring

With the expansion of business and its needs, the factors have widened their area of service to sectors where they were not present earlier. The growing technology and ease of communication has led to the expansion of factoring services and has enabled them to enter specific industries.

The terms and conditions of each industry are different as they work with different business models. The approach of factor varies from industry to industry depending upon the cost of factoring service. Some of the specialized factoring services are as follows:

Real Estate Factoring

In real estate factoring, the business sells its accounts receivables in the form of real estate commission to a third party called factor at a discount. The factors provide the factoring service only to licensed real estate agents. The real estate factoring was first introduced in Canada. Later, it made its way to America after 2007 recession. The real estate factoring model has become global and followed in almost all countries around the world.

Medical Factoring

The healthcare industry has long payment cycles and faces cash flow problems due to the slow payment process. The long time horizon to receive the payment is the biggest challenge that the healthcare industry is facing today. Medical factoring solves this problem by purchasing the medical claims and making payments to the companies. The factoring agency in return charges fees or commission and holds the claims until maturity.

Construction Factoring

Specialized Factoring

The construction industry requires the services of factoring because the payment cycle in this industry is very long. The average payment cycle is 120 days and sometimes even more. This makes the functioning of the industry difficult. To overcome the problem, the factor purchases the construction receivables from the clients and allows them to function smoothly. This saves the construction industry from the various risks and exposure associated with the business.

Trucking Factoring

The factoring companies provide their factoring services to those firms that run trucks or provide services using the truck as a transportation medium. The trucking factoring services include purchasing their invoices, funding them based on the invoice copies sent by email or text. The factoring services also include providing the truckers with fuel advance cash if they have a confirmed pickup of the load.

 Conclusion:

Factoring services have become a critical part of the business as they provide business with regular cash by purchasing its receivables. It saves the time of dealing with the receivables and helps to focus on their core business areas. With the growing needs of factoring, their services have entered into different specialized sectors. This has eased the business functioning and helps in meeting their working capital needs.

References:

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Terms of Factoring | training100.ru http://training100.ru/sources-of-finance/terms-of-factoring http://training100.ru/sources-of-finance/terms-of-factoring#respond Thu, 03 Aug 2017 08:21:35 +0000 http://training100.ru/?p=4963 Factoring is one of the best ways to raise capital for a business. In this transaction, the owner of the business sells all or part of its invoices or accounts receivables to a third party at a discounted price. Such third party assumes the credit risk of the business and is known as ‘factor’. ‘Accounts receivable financing’ is another name of Factoring. The main aim of the companies while entering into such a transaction is to receive cash speedily on their receivables. It allows businesses to build their cash flows stronger and make the payment cycle faster for efficient business

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Factoring is one of the best ways to raise capital for a business. In this transaction, the owner of the business sells all or part of its invoices or accounts receivables to a third party at a discounted price. Such third party assumes the credit risk of the business and is known as ‘factor’. ‘Accounts receivable financing’ is another name of Factoring.

The main aim of the companies while entering into such a transaction is to receive cash speedily on their receivables. It allows businesses to build their cash flows stronger and make the payment cycle faster for efficient business handling.

Example of Factoring

Let us understand this by a simple example:

Suppose ABC Ltd. has a total of $1,00,000 receivables and it wants to release some cash immediately. In order to raise its capital and release cash, it shall enter into a factoring agreement. In such agreement, depending upon the terms and conditions, the factor ‘X’ discounts the receivables by say 10% and agrees to make payment to the company within 2 days. Thus, at the end, the factor would end up paying $90,000 cash to ABC Ltd. and the margin of $10,000 would be either his factoring commission or fee.    

Terms of Factoring

Factoring Terms

In the above example, we clearly saw how essential the terms and conditions are for any factoring agreement. On the basis of the following terms, one may decide whether to enter into a factoring agreement or not. These terms are:

Contract Limit

Depending upon the funding requirements of the company and the ability of the factor to make the payment, the contract limit is set. Each factor sets his own minimum and maximum limit before entering into any factoring agreement with the companies.

Term of Contract

When the companies approach factors (or factoring agencies) for working capital finances, majorly, the ‘term of contract’ plays an essential role. Depending upon the period, one decides the term of the contract. Mainly, there are two types of contracts based on the term:

  • Long Term Contracts: Long term contracts are normally for a period of 12 months or more. In such contracts, the factor agrees to buy the receivables at a bargain/discounted rate. The major benefit of such contract is that it not only builds a beneficial relationship between the factor and the company but it also results in lower factoring rates and other costs associated with
  • Short Term Contracts: These short-term contracts are for a shorter period, say up to 6 months. Mainly, such factoring is very useful for small transactions of the business on a continuous basis. Though these contracts are more flexible as compared to the long-term contracts, they end up in high factoring

Advance Rate

One of the most important aspects of these agreements is the advance rate. Advance rate is the fixed percentage of claim amount that a company receives from the factor. Though this rate normally ranges from 85% to 90%, it is subject to modification depending upon the funding needs and type of business.

Payment Deadline

The urgency of the requirement of funds by the company determines the payment deadline. Mostly, the completion of initial transaction takes place within 1 to 7 days and funding takes place within 24 to 48 hours thereafter.

Percentage of Fees or Commission

The factor receives a fixed percentage of the claim amount from the company for providing factoring services. This amount is known either as ‘factoring fees’ or ‘factoring commission’

Guarantee

To affirm the individual integrity, warranties, validation of various statements and documents, to perform attestation functions, etc., a guarantee clause is included in the agreement. It saves both the parties from the risk of fraud.

Recourse/Non-recourse

The major difference between recourse and non-recourse factoring is the assumption of credit risk. Generally, the funding on non-recourse basis is more popular as it provides protection against legal bankruptcy, insolvency, and loss on non-payment.

Any Other Terms or Conditions

There is no fixed tailor made terms and conditions for entering into a factoring agreement. Depending upon the payment ability and risk assumption capacity of the factor against the necessity of funds by the companies, any additional clause may be included in a mutual agreement.

Conclusion

Factoring is one of the quickest and flexible ways for businesses to build up their cash flows. Though this totally depends upon the unique needs of the business, it is today one of the most popular methods to raise finance.

References:

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Financing Strategies | training100.ru http://training100.ru/financial-management/financing-strategies http://training100.ru/financial-management/financing-strategies#comments Mon, 31 Jul 2017 12:03:28 +0000 http://training100.ru/?p=4888 Meaning of Financing Strategies A financing strategy establishes the fundamental steps of how an organization can achieve its financing targets, be it short term or long term. It involves a strategic plan as to how the organization can finance its overall operations. An ideal financing strategy must serve as a guideline for the employees of an organization in conducting the day to day finances. Example of Financing Strategies Some of the popular examples of financing strategies for giving a head-start to your business are as follows: Debt Financing: This financing strategy lets you borrow money from banks or other lending

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Meaning of Financing Strategies

A financing strategy establishes the fundamental steps of how an organization can achieve its financing targets, be it short term or long term. It involves a strategic plan as to how the organization can finance its overall operations. An ideal financing strategy must serve as a guideline for the employees of an organization in conducting the day to day finances.

Example of Financing Strategies

Some of the popular examples of financing strategies for giving a head-start to your business are as follows:

  • Debt Financing: This financing strategy lets you borrow money from banks or other lending institutions for using it in your business. The organization can repay the loan along with an interest depending on the terms of the contract.
  • Equity Financing: This financing strategy involves financing from investors also called as “venture capitalists”. These investors agree to assist you in your business plans in lieu of ownership of a portion of your organization with their venture funding.
  • Personal Financing: This is the less formal financing strategy whereby you can cater to your funding needs by asking your friends and family. This is very effective if you are a small business start-up.Financing Strategies

Financing Strategies of Current Assets / Financing Strategies of Working Capital

An organization can finance the Current Assets / Working Capital by using the following financing strategies:

  • Matching Approach: As per this financing strategy, the organization matches the expected life of the current asset with the estimated life of the source of fund to raise these financial assets. For example, a machine whose life expectancy is 5 years can be funded using a loan of 5 years. The flip side of using this approach to finance your assets is that it may not be practically possible to match the life of an asset with that of its source of fund.

Similarly, for working capital financing, the matching approach aims to match the assets and liabilities to maturities. Thus, for every asset on the balance sheet, there is a corresponding liability that matures on the same day as the asset.

  • Conservative Approach: As per this financing strategy, the organization relies on the long-term funds to acquire permanent assets and a part of temporary assets. As this financing strategy uses long-term funds, it has less risk of a shortage of immediate funds.

For working capital financing, this financing strategy requires an organization to maintain high levels of current assets in relation to its sales. Such surplus current assets can incorporate any changes in the sales and thus avoid disruption in the production plans.

  • Aggressive Approach: As per this financing strategy, the organization uses its short-term funds to finance a part of its permanent assets. This is a very risky approach as there are chances that the organization might have a hard time dealing with its short-term obligations. However, many organizations use this financing strategy for its advantages of lower financing cost and higher profitability.

For working capital financing, under this approach, the reliance is on short-term funds that are used for maintaining the current assets. These current assets are maintained only to meet the current liabilities and do not provide any cushion for the variation in working capital requirements.

Conclusion

Financing strategies are imperative for all the organizations to help in planning their financial future. A financing strategy can assist you with setting clear cut goals and working towards becoming a financially secure business organization. It takes into account your current financial status, your financial objectives and the best possible steps to achieve them.

References:

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Convertible Debentures | training100.ru http://training100.ru/sources-of-finance/convertible-debentures http://training100.ru/sources-of-finance/convertible-debentures#respond Mon, 24 Jul 2017 12:08:54 +0000 http://training100.ru/?p=4791 Meaning of Convertible Debentures Convertible debentures can be term as debt security or loan that can be converted into equity shares after a stipulated period. The conversion of debentures into equity shares is at the option of the holder. However, in special circumstances, the issuer holds such conversion rights. About Convertible Debentures Business firms issue convertible debentures to avail tax benefit. The company can get the advantage of tax deduction on the interest paid to the investors. This reduces the cost of capital of the company. However, at the time of conversion when a company issues additional shares, the value

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Meaning of Convertible Debentures

Convertible debentures can be term as debt security or loan that can be converted into equity shares after a stipulated period. The conversion of debentures into equity shares is at the option of the holder. However, in special circumstances, the issuer holds such conversion rights.

About Convertible Debentures

Business firms issue convertible debentures to avail tax benefit. The company can get the advantage of tax deduction on the interest paid to the investors. This reduces the cost of capital of the company. However, at the time of conversion when a company issues additional shares, the value of the equity shareholders decline due to stock dilution. There are many types of debentures which a company can issue. Two popular types among them are:

Convertible Debentures

Debentures in which the company issues an interest bearing loan that can be converted into equity shares after the stipulated time. The interest on these debentures is generally low. The debenture holders can opt for receiving the interest and principal amount at the time of maturity. However, if they are interested in becoming a part of the company, they can opt for converting the debentures into equity shares.Convertible Debentures

Non-Convertible Debentures

Unlike, these debentures, non-convertible debentures cannot be converted into equity shares. The interest rate on these debentures is usually high. The companies issuing non-convertible debentures have to make an arrangement with the bank by depositing a fixed amount and part of profits regularly.

The business organizations can issue debenture of any type depending on its suitability. When the firm issues convertible debentures, it has to select which type of convertible debenture it wants to issue. The following are the two types of convertible debentures:

Types of Convertible Debentures

Fully Convertible Debentures

Fully Convertible Debentures are those debentures in which the whole value of debentures is convertible into equity shares of the company. The holder of this debentures gets equity shares of the company in the ratio determined by the company during the time of issue.

Partly Convertible Debentures

Partly convertible debentures differ from fully convertible debentures. In partly convertible debentures, only some part of the debentures shall be eligible for conversion into equity shares. The ratio of conversion is determined at the time of issue of convertible debentures. The part of convertible debentures can be converted into equity shares only after the approval of debenture holders.

Conclusion

Convertible debentures are the quick and easy mode of finance for a business organization. The business can avail funds by issuing debentures and utilize it towards the growth of the business. These debentures give an opportunity to the investor to become a member of the company by converting them into equity shares at the time of maturity. The additional benefit of taxes on the convertible debentures also plays a significant role while selecting it as a source of finance for the business.

References:

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Financing Policy | training100.ru http://training100.ru/financial-management/financing-policy http://training100.ru/financial-management/financing-policy#respond Mon, 17 Jul 2017 06:21:58 +0000 http://training100.ru/?p=4778 Meaning of Financing Policy Financing Policy refers to the decisions, choices or regulations related to the financial system of the organization like payment system, borrowing system, lending system etc. The policies are framed to introduce financial stability, promote market efficiency and enhance the value of the firm for its stakeholders. A well-made financing policy is important for the growth of the organization in long run. A business can show good growth and expand its profitability if the financial aspects are maintained in a transparent manner. Good governance on financial performance and financial policy ensures higher returns on the capital invested.

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Meaning of Financing Policy

Financing Policy refers to the decisions, choices or regulations related to the financial system of the organization like payment system, borrowing system, lending system etc. The policies are framed to introduce financial stability, promote market efficiency and enhance the value of the firm for its stakeholders.

A well-made financing policy is important for the growth of the organization in long run. A business can show good growth and expand its profitability if the financial aspects are maintained in a transparent manner. Good governance on financial performance and financial policy ensures higher returns on the capital invested. Every organization frames its financing policy depending on its functionality, requirements, suitability and environment in which it is functioning.

Like, an organization looking for long-term finance can go for financing in the form of equity or preference shares, debentures, etc. For short-term finance requirements like working capital, the organization can borrow funds in the form of bank loan, factor receivables, commercial paper, etc. Similarly, the instant requirement of funds can be met by trade credit, outstanding facilities, etc.

Financing Policy

The cost of financing for long-term is always higher than the short term. However, the risk in short-term financing is always greater. The financing policy of the organization determines the type of borrowing which business should opt for.

Let us have a look at different types of financing policy.

Types of Financing Policy

  • Hedging Policy: Hedging policy involves offsetting the finance for an asset with a liability that matures on the expected life of the asset. For example, a business wants to purchase machinery having an expected life of 20 years. It can do so by financing the asset by a 20-year loan. This way the asset and liability both will mature at the same period. The purpose of hedging policy is to match the assets and liabilities during the relinquishing period.
  • Conservative Policy: An organization’s attempt to match the assets with the liabilities is not always possible. In such situations, the business uses conservative financing policy. In this policy, the firm uses more of long-term sources of finance and less of short-term finance to purchase its asset. The business acquires the permanent and current assets using long-term sources of finances. Only a part of short-term finance is used to finance its temporary current assets.
  • Aggressive Policy: Aggressive financing policy comprises of relying more on short-term sources of finance then long-term sources. It is termed as aggressive policy because it is riskier as it involves the continuous renewal of the borrowing. In this policy, the firm finances its permanent current assets using the short-term sources of finance.
  • Highly Aggressive Policy: A highly aggressive financing policy is one where the major part of the permanent asset is financed by long-term sources and a minor portion is financed by short-term sources. It is a common assumption that the firms which follow this policy are nearing their closure and are termed as “sick”.

Depending upon the strategy and requirements of the organization, it can adopt different types of financing policy. However, there are different aspects that businesses should consider while taking decisions relating to financing policy.

Financing Policy Decisions 

  • Investment Decisions: Investment decisions of the organization depends on the long term or short term investment requirements. The long-term investment decision involves investment in capital assets of the organization and the short-term investment decision involves working capital management. Financing policy of the firm considers the investment requirements and accordingly arranges for the funds. The interest rates on the long-term funds are comparatively lower than the short-term funds.
  • Financing Decisions: The finance manager of an organization needs to select those sources of finance which result in optimum and efficient capital structure. The duty of the finance manager is to select a right proportion of debt and equity in the overall capital mix. Higher debt results in higher interest liability and higher risk. By increasing the equity, permanent funds of the business will increase but it will also result in higher expectations of the shareholders in the form of a higher The financing decisions are based on increasing the wealth of shareholders along with the profitability of the organization.
  • Dividend Decisions: Distributing dividends is an important aspect of the business while determining the financing policy. The major concern while taking dividend decision is determining how much profits are available to distribute to the shareholders. Dividend decision must be based on dividend stability policy and future outlook.

If the firm distributes higher dividend and there are growth opportunities for the firm, then it will have to borrow funds from the market to cater to the expansion needs.

Conclusion

Financing policy of an organization determines the potential of a business organization. The right set of plans, policies and regulations can help the business grow at a rapid pace.

References: 

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Intangible Assets and its Types | training100.ru http://training100.ru/financial-accounting/intangible-assets-and-its-types http://training100.ru/financial-accounting/intangible-assets-and-its-types#respond Mon, 10 Jul 2017 06:55:38 +0000 http://training100.ru/?p=4559 Assets can be classified into different types based on Convertibility – Current Assets and Fixed Assets Physical Existence – Tangible Assets and Intangible Assets Usage – Operating Assets and Non-operating Assets To learn more about the types of assets, refer to the article – Meaning and Different Types of Assets. In this article, we will focus on understanding the meaning and types of Intangible assets. Meaning of Intangible Assets An intangible asset is an asset that does not have any physical existence. Like tangible assets, you cannot touch or feel them but they have a current and future value. They

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Assets can be classified into different types based on

  • ConvertibilityCurrent Assets and Fixed Assets
  • Physical Existence – Tangible Assets and Intangible Assets
  • Usage – Operating Assets and Non-operating Assets

To learn more about the types of assets, refer to the article – Meaning and Different Types of Assets.

In this article, we will focus on understanding the meaning and types of Intangible assets.

Meaning of Intangible Assets

An intangible asset is an asset that does not have any physical existence. Like tangible assets, you cannot touch or feel them but they have a current and future value. They are long-term assets of a company having a useful life greater than one year. A business can either develop these assets internally or can acquire them in a business combination.

Intangible Assets

Types of Intangible Assets

Following are the common types of Intangible assets:

Goodwill

It is a type of intangible asset that is recognized when one business acquires another business. Goodwill equals the cost of purchase of the business by the purchasing company minus the value of net assets of the purchased company. It represents the business reputation of a company.

Let’s say, A Ltd. acquires B Ltd. for $ 10 million. At the time of purchase, the fair value of net assets (assets minus liabilities) of B Ltd is $ 7 million. Here the difference between the cost of purchase $ 10 million paid by A Ltd. and $ 7 million net fair value of the assets of B Ltd. is the value of goodwill which amounts to $ 3 million.

Franchise Agreements

Franchise agreements are another type of intangible asset that grants the legal right to a business to operate using the name of another company or sell a product or service developed by another company. These are classified as assets because the business owners reap monetary gains with the help of these intangible assets.

For example, many fast food restaurants like KFC, McDonald’s, Subway, Dominos, etc. operate using a franchise system. Here the franchisor grants varying amount of autonomy to the franchisees to use the brand name and benefit from franchisor’s extensive marketing.

Patents

A patent is a type of intangible asset that grants a business the exclusive right to manufacture, sell or use a specific invention. A company can purchase the patent from another company or it can invent a new product and receive a patent for it.

Copyrights

Copyright grants an extensive right to the business to reproduce and sell a software, book, journal, magazine, etc. It is an intangible asset used to secure legal protection by preventing others from reproducing or publishing a work of authorship.

Trademarks

A trademark is an intangible asset which legally prevents others from using a business’s name, logo or other branding items. It is a design, symbol or a logo used in connection with a particular product or a business.

Conclusion

Intangible assets lack physical substance but they have a value because of the long-term benefits, exclusive privileges and rights they provide to a company. Just like other assets, companies account for intangible assets in the balance sheet. However, the cost of intangible assets is periodically allocated to the expense during the useful life of the asset or its legal life, whichever is less.

References:

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Hedging | training100.ru http://training100.ru/derivatives/hedging http://training100.ru/derivatives/hedging#respond Mon, 03 Jul 2017 06:19:55 +0000 http://training100.ru/?p=4537 Hedging Meaning Hedging is a risk management strategy. It deals with reducing the risk of uncertainty related to the adverse price fluctuations in an asset. The aim of this strategy is to restrict the losses that may arise due to unknown fluctuations in the investment prices and to lock the profits therein. It works on the principle of offsetting i.e. taking an opposite and equal position in two different markets. In simple terms, it is hedging one investment by investing in some other investment. Generally, when people plan to hedge, they try to insure themselves against a negative event. This

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Hedging Meaning

Hedging is a risk management strategy. It deals with reducing the risk of uncertainty related to the adverse price fluctuations in an asset. The aim of this strategy is to restrict the losses that may arise due to unknown fluctuations in the investment prices and to lock the profits therein. It works on the principle of offsetting i.e. taking an opposite and equal position in two different markets. In simple terms, it is hedging one investment by investing in some other investment.

Generally, when people plan to hedge, they try to insure themselves against a negative event. This does not prevent the event from occurring, but it surely reduces its impact. Not only individual investors but portfolio managers and large corporations also use this hedging technique to minimize the exposure to various types of risks and decrease the negative impact thereon.

Hedging Example

Let us understand Hedging by a simple example.

When you buy a life insurance policy, you support and secure your family’s future in case of your death or any serious injury in some accident.

Similarly, when you secure your ‘A’ investment’s loss by offsetting it with ‘B’ investment’s profit, it is known as ‘Hedging’.   Hedging

Areas of Hedging and their Risks

A business can implement hedging technique in the following areas:

Commodities

Commodities include agricultural products, energy products, metals, etc. The risk associated with these commodities is known as “Commodity Risk”.

Securities

Securities include investments in shares, equities, indices, etc. The risk associated with these securities is known as “Equity Risk” or “Securities Risk”.

Currencies

Currencies include foreign currencies. There are various types of risks associated with it. For e.g. “Currency Risk (or Foreign Exchange (Currency) Exposure Risk)”, “Volatility Risk”, etc.

Interest Rates

Interest rates include the lending and borrowing rates. The risks associated with these rates are known as “Interest Rate Risks”.

Weather

Interestingly, weather is also one of the areas where hedging is possible.

Hedging Types

Not only for reducing risk, hedging is also useful as a means to earn profits by trading in various commodities, securities or currencies. Depending on these areas, broadly there are three types of hedging:

Forward

Forward (or a Forward Contract) is a non-standardized contract to buy or sell an asset between two independent parties at an agreed price and a specified date. It covers various contracts like Forward exchange contracts for currencies, commodities, etc.

Futures

Futures (or a Futures Contract) is a standardized contract to buy or sell an asset between two independent parties at an agreed price, standardized quantity, and a specific date. It cover various contracts like currency futures contracts, etc.

Money Markets

It is one of the major components of financial markets today, where short-term lending, borrowing, buying and selling are done with the maturity of one year or less. Money markets cover a variety of contracts like money market operations for currencies, money market operations for interest, covered calls on equities, etc.

Hedging Strategies

A hedging strategy generally refers to the risk reduction technique of an investment. There can be no standard strategy to hedge various financial instruments like forward contracts, options, swaps or stocks because these strategies require constant modification as per the type of market and investment, which requires hedging. To face such situations, a business can implement few strategies which are as follows:

Hedging through Asset Allocation

You can do this by diversifying your portfolio with more than one type of asset. For e.g. you can invest 70% in equity and the rest 30% in other more stable assets, to create a balanced portfolio.

Hedging through Structures

You can do this by investing a portion of the portfolio in debt and the other in derivatives. Where debt portion brings stability in the portfolio, the derivatives help in protecting it from the downside risk.

Hedging through Options

You can do this by buying a call option and selling a put option and vice-versa. This helps directly in protecting the portfolio, especially the equity portfolio.

Staying in Cash

It is a ‘No Investment’ strategy. Here, the investor does not make an investment in any asset and thereby keeps his cash in hand.

Conclusion

Hedging is one of the best means to reduce the unpredictable nature of a portfolio by minimizing the risk of loss. This, in turn, helps the market to run in an orderly and efficient manner.

References:

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Dividend Payout Ratio | training100.ru http://training100.ru/dividend-decisions/dividend-payout-ratio http://training100.ru/dividend-decisions/dividend-payout-ratio#respond Mon, 26 Jun 2017 08:01:30 +0000 http://training100.ru/?p=4467 Dividend Payout Ratio Definition Dividend Payout Ratio is the amount of dividend that a company gives out to its shareholders out of its current earnings. The earnings that the company retains with it after paying off the dividends is called as “Retained Earnings” and is invested by the company for its growth and future. In other words, the total earnings of a company comprises of two essential parts i.e. Dividend payout ratio (the dividend it pays) and Retention Ratio (the amount it retains for re-investing in the business). Dividend Payout Ratio Equation  The dividend payout can be calculated using two

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Dividend Payout Ratio Definition

Dividend Payout Ratio is the amount of dividend that a company gives out to its shareholders out of its current earnings. The earnings that the company retains with it after paying off the dividends is called as “Retained Earnings” and is invested by the company for its growth and future. In other words, the total earnings of a company comprises of two essential parts i.e. Dividend payout ratio (the dividend it pays) and Retention Ratio (the amount it retains for re-investing in the business).

Dividend Payout Ratio Equation

 The dividend payout can be calculated using two different Dividend payout ratio equations, each of which can be easily computed from the data in your financial statements and give the same results.

It is important to note that both the numerator and denominator in this equation do not include any preference dividends or preference shares and only include the dividend, which is paid to common equity shareholders. To arrive at the numerator, you can divide the total dividend payable to equity shareholders by the total number of outstanding equity shares of the company. Similarly, for calculating the earnings per share, divide the total earnings of the company by the number of equity shares.

In this equation too, preference dividend or shares are not to be included in the calculation of total dividend and net income. This equation is relatively simpler as it requires lesser calculations and you can straight away pick up the concerned figures from the financial statements.

Dividend Payout Ratio Example

Let us understand the concept of Dividend payout ratio with a practical example.

Suppose, the annual dividend paid by ABC Company is Rs. 30 per share. The net earnings of ABC Company during this period is Rs. 100 per share.

Using the below formula, we can calculate the dividend payout ratio as follows:

As 30% is the dividend payout ratio, it automatically means that 70% (100-30) is the retention ratio with which the company has decided to fuel its long-term objectives and overall growth.

Dividend Payout Ratio Analysis

Now it may seem that a company paying a higher dividend payout ratio is at a better position than a company with a lower dividend payout ratio, however, it is not necessarily true. What needs to be looked at is that how consistently the company has been paying out those dividends. A company with a stable 20% dividend payout ratio since say, 10 years, is more trustworthy than a company with a dividend payout ratio of 30% but which is consistently on the decline over the years. In the latter case, it is possible that in the coming years the company may not be able to pay dividends at all. Consistency or long-term trends are what you should focus on, more than the dividend rate.Dividend Payout Ratio

It is also imperative to know that most of the startup companies or the companies that are looking to expand their business, understandably, have a lower dividend payout ratio, as they want to retain as much of the earnings and use it for bringing the company up. These companies start giving higher dividends as and how they progress. Therefore, if you are looking for a steady dividend income you can always keep this factor in mind and look for companies that have been in the running for a long time and with a good performance record. Though beware of extremely high dividend payout ratios as that means the company is giving out most of its earnings and relying on a very negligible amount for investing in its future operations, which is not a good sign.

Conclusion

Dividend Payout Ratio lets an investor calculate the percentage of the dividend that the company has decided to distribute out of its net earnings. It is of utmost importance to keep a track of the dividend payout ratio of a company over the years to take a call as to which company would be the right choice to invest in.

References:

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Vertical Merger | training100.ru http://training100.ru/mergers-and-acquisitions/vertical-merger http://training100.ru/mergers-and-acquisitions/vertical-merger#respond Mon, 19 Jun 2017 06:16:37 +0000 http://training100.ru/?p=4445 Meaning of Vertical Merger A vertical merger is a merger between two or more entities who operate in the same industry but at the different levels of the production process. These entities produce similar finished goods or services. Vertical merger helps in bringing efficiency in operations and expanding the revenue streams of the business. It is a strategy for the expansion of company’s business operations into different steps on the same production path. Vertical Merger Business Definition As per the business definition of Vertical Merger on MBDV.Gov, “Vertical merger occurs when two or more firms, operating at different levels within

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Meaning of Vertical Merger

A vertical merger is a merger between two or more entities who operate in the same industry but at the different levels of the production process. These entities produce similar finished goods or services. Vertical merger helps in bringing efficiency in operations and expanding the revenue streams of the business. It is a strategy for the expansion of company’s business operations into different steps on the same production path.

Vertical Merger Business Definition

As per the business definition of Vertical Merger on MBDV.Gov, “Vertical merger occurs when two or more firms, operating at different levels within an industry’s supply chain, merge operations.” While as per another definition on business.gov, “Vertical Merger is a combination of two or more firms involved in different stages of production or distribution of the same product.”

Along with vertical merger, there are few more types of mergers and acquisitions useful for the growth and diversification of the companies businesses. To know about them, click here.

Vertical Merger

Vertical Merger Example

XYZ Ltd. is a textile manufacturer. ABC Ltd. is the supplier of cotton to XYZ Ltd. since many years. XYZ Ltd. and ABC Ltd. decide to merge their business. We can see that both the business entities are involved in the different stages of the production process. The reason for merging is to bring efficiency in operations by cutting the extra costs and increase the profits of both the businesses.

Vertical Merger and Horizontal Merger

Vertical merger and horizontal merger are two separate concepts. It usually takes place between a manufacturer and a supplier whereas horizontal mergers take place by acquiring the competitor who is in the same line of business as of the acquiring company.

The main aim of a vertical merger is to increase the market share, improve efficiencies and maximize cost savings to realize higher profits while horizontal merger aims at expansion of the company’s product range and increasing its revenue by selling more and more goods or services.

It is also known as ‘Vertical Integration’ can take place either through forwarding integration or through backward integration. On the other hand, horizontal merger better known as ‘Horizontal Integration’ consists of the acquisition of companies in the same industry, producing similar goods or services.

The logic behind the vertical merger is to increase synergies created by the merging firms and increase the overall operational efficiency whereas horizontal merger’s logic is to reduce the competition in the market place creating a monopoly for the business.

Conclusion

A vertical merger is becoming an integral part of many business strategies nowadays. The economic benefits of the vertical merger are driving many business houses to join hands with other businesses working at different levels of the supply chain for similar products and services. Going ahead, the vertical merger will become a common norm because of many economic benefits.

References:

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Horizontal Merger | training100.ru http://training100.ru/mergers-and-acquisitions/horizontal-merger http://training100.ru/mergers-and-acquisitions/horizontal-merger#respond Mon, 12 Jun 2017 13:12:12 +0000 http://training100.ru/?p=4404 Meaning of Horizontal Merger A horizontal merger involves a merger between two or more businesses that offer similar products or services and work in the same industry. In this merger, one entity buys another entity which is its competitor in order to form a new combined entity. A horizontal merger is done with the intent to gain higher synergies and capture greater market share. Horizontal Merger Economics Definition As per the economic definition of the horizontal merger on MBDA.Gov, “Horizontal merger is a business consolidation that occurs between firms who operate in the same space, often as competitors offering the

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Meaning of Horizontal Merger

A horizontal merger involves a merger between two or more businesses that offer similar products or services and work in the same industry. In this merger, one entity buys another entity which is its competitor in order to form a new combined entity. A horizontal merger is done with the intent to gain higher synergies and capture greater market share.

Horizontal Merger Economics Definition

As per the economic definition of the horizontal merger on MBDA.Gov, “Horizontal merger is a business consolidation that occurs between firms who operate in the same space, often as competitors offering the same good or service.” There are many types of mergers.

Why Horizontal Merger?

Businesses opt for horizontal merger due to the growing competition. When two or more entities in the same line of business merge, they bring economies of scale by reducing the overall costs of the business. The horizontal merger enables the new entity to offer a wide range of products and services to their customers in the most efficient way. It gives an opportunity to diversify their business, enter new potential markets and cover a bigger market share. The business also gets access to more number of resources than it had prior to the merger. There are many other benefits of merger.

Horizontal Merger

Horizontal Merger Example

Let us take a hypothetical example to understand the concept of a horizontal merger. If Pepsi and Coca-Cola merge, it would be termed as a horizontal merger. Both the companies produce a similar type of product and cater to the same customer group. As a result of the merger, both the companies will be able to function more efficiently and cut down on the common costs, bringing economies of scale. The merger between HP and Compaq is real life example of a horizontal merger.

Horizontal vs. Vertical Merger

Horizontal merger and vertical merger are two different concepts altogether. A horizontal merger is the merger of two or more businesses in the same industry that produces similar goods or services. On the other hand, the vertical merger is merging of two or more businesses that produce different goods or services. The vertical merger takes place among firms that operate in the same industry but at different levels of the supply chain.

Horizontal vs. Joint Venture

Joint venture is a business arrangement between two or more businesses to achieve a specific task. Once the task is accomplished, the joint venture ceases to exist. On the other hand, horizontal merger consists of a merger of two or more companies in the same industry, producing similar goods or services. Horizontal merger aims to reduce the competition in the marketplace by creating a monopoly for the business.

Conclusion

Businesses are facing tough times due to ever growing competition. Their synergy costs are increasing and margins are declining. To overcome this problem, the horizontal merger is the solution for the business. When two entities in the same industry that is producing similar goods or services merge together, it brings efficiency in operations and decline in costs.

References:

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