Monthly Archives: January 2017

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Business Start-Up

Category : Articles


The business world today viewed as fast paced, diversified and full of money to be made. If you have the drive to go out there take calculated risks and carve out your place in this ever changing world it could turn out to be a lucrative adventure. The entrepreneurs of today are doing just that, they are examining what consumer??™s trends would be beneficial to their ideas, services and or products. To be successful in today??™s market the modern day entrepreneurs are observing four key environments; The Economic and Legal, Technological, Social, and the Competitive.

In the United States we have the freedom to start a business at any time without excessive government regulations. An individual or group can start a business in their home or in a facility tailored to suit their business needs. There are many things that need to be considered when opening a new business. The four important issues are the economic and legal environment, the technological environment, the social environment, and the competitive environment.
The economics of starting a business are very important. Getting the money to start a business is one of the first things that should be considered before a business is started. The risk of losing the money has to be worth the reward. Before you start your business you need to decide what financial risk you??™re willing to make for the possible reward. When I asked Jamie how much financial risk he was willing to take he had thought the greater the risk the greater the reward. If you really believe in your product taking a big risk is the best way to start a business. Jamie has a simple motto that he goes by when starting a business ???Go big or go home.???
There are many ways that you can get the money to start a business, take out a loan on an asset that you own, have family and friends invest in your business, or get the money from organizations such as the SBA. An estimated ninety percent of all startups receive money from family and friends (Nickels, McHugh, McHugh, 2008). This can be a great option if the loan has little or no interest. Family and friends may also be more flexible on how they are paid back. Often times when starting a new business your income may be inconsistent, so flexibility of how the loan is repaid can be a great option for your company. The down side to borrowing from family and friends is that you run the risk of damaging your personal relationships if you cannot pay the loan back in a timely manner or the business is not a success. If this is the option that you decide make sure specific guidelines are laid out of how the loan well be repaid in multiple circumstances. During my interview I learned that Jaime started his business by taking out a home equity loan. This is also a great option, because the interest on you loan is at a much better rate then on a business loan. Some home equity loans work like a credit card so you only have to pay interest on the money that you are using and you get the great interest rate on a home equity loan. The disadvantage to a home equity loan is that if you default on the loan you run the risk of losing your home.
Starting with a business plan that has a detailed description of how to handle the finances is very important. The first thing that you need to know is how much money you need to get your business started. Starting with a rough budget well help you come to a number of how much money that you will need to get started. This budget may change as your business gets started but it is important not to change your bottom line. If you only have a set amount of money, if you go over that amount something else well not get paid, or you may end up paying the expense of high interest credit cards.
Make sure that all of the things that you will need are in your budget. Such as rent, utilities, inventory, and salaries. A large mistake that people make is that they forget to pay themselves. Be realistic about how much money that you need to live. Nothing makes morale worse than if you??™re not making enough money to live.
Another item that you need to keep a close watch on is your inventory. Make sure that your inventory is not growing faster than you can pay for it. Capital goods are also a large expenditure that can grow out of control very easily. Having the latest and greatest capital does not always work to the companies benefit. Your revenue has to be high enough to keep the capital working efficiently. For example, if you are buying a copy machine and you plan on charging for each copy. There is a copy machine for sale for one thousand dollars and it can copy seven thousand prints per day. You can instead buy a copy machine for two thousand dollars that can print twenty five thousand prints a day. The more expensive copier might seem like a better deal, but if you only make one thousand prints a day the more expensive copier is not necessary. Over time you may be able to utilize the more expensive copier but during the time you do not need the more expensive copier you are paying the extra interest on it.
The government plays a large role in your business as you get started. Understanding how the tax laws work is important. As a starting business, you may want to structure your business so that you can push off paying as much tax as you can. When starting out your cash flow becomes very important to the health of your business.
How to legally structure your company can be a key to your success. Each situation has a different way to set your company up. If you are in a business that the worst case scenario is that you can lose everything that you own, setting up as a corporation may be your best choice. Because then you can protect your personal assets. The biggest problem that I have found with corporations is that when you do go and try to get credit they make you sign a personal guarantee that the money well be paid back. Corporations are also a lot more paper work then a sole proprietorship. A new company usually does not need more work to do. For these reasons a sole proprietorship maybe the best choice for your business. I think that if you are in business by yourself and plan to stay small a sole proprietorship maybe your best choice.
Another choice that you have is to a partnership when your business starts. There are many advantages to a partnership. The amount of time taken to run a business is cut in half which can be a great option. You well have more time to expand the business rather than spending all of your time on day to day operations. Another advantage is help with the financial side. Your partner has to come up with half the money that is needed to start the business. It is also a great asset to half another set of ideas that can help your business start. The biggest disadvantage is that there may be disagreement of how the business should be run. I believe that one person should make decisions. Sometimes splitting up the responsibilities is a great way to handle a partnership. I also believe that silent partner is a great way to start a business. You get a lot of advantages without the disadvantages.
Webster??™s dictionary defines technology as the practical application of knowledge especially in a particular area. When you think of technology this way it changes what most people are picturing in your head as technology. I believe most people think of technology as the newest laptop computer or gadget like an iPhone. While these do fit the definition for technology, if they are not used for the proper purpose they are just another wasted piece of equipment. A better saw blade to most would be considered a tool but not technology, the other side of this definition is something most people would not consider to be technology but really is if used properly. An example of this is if you own a marble business and this new saw blade helps to reduce waste and increases output, it is now a great piece of technology. If a new business takes these three questions into account when looking for the appropriate technology it should do well, what is out there to help the business, what is the appropriate way to use it and is this technology cost effective for the business
Finding technology that will benefit your business is one of the best ways to make the people working there as efficient as possible. There are all kinds of technologies out in the marketplace to help businesses succeed so the first thing you need to do is find what is appropriate to help your business. If your company distributes product to stores all over a designated area and you buy laptops for the trucks so they can constantly be in contact and give and get updated information in real time. This is great use of technology and allows you to have an efficient delivery workforce; however if you did the same thing but later realized that they didn??™t have cellular reception capabilities this technology really would not provide near the value. This is an easy example of two very similar pieces of technology and one provides a business with the efficiencies it needs and the other that is just technology without the benefits needed.
Once a business finds the technology to help improve the business the next step is how it makes use of that piece of technology. With the company I talk about above they could find the best distribution software they can afford and if they do not implement it properly it will not bring them the benefits that they need or expected. There are many ways once a company finds the technology they need to improve the business where things can still go wrong. Implementing technology can be difficult and getting people to use it can be just as much of a problem. It is possible that implementing a piece of technology can cost as much or more then the initial expense to buy it. I have seen people who have been shown simple ways to make their job easier through the use of technology and they continue to do things in a manual way just because they are comfortable with how they are doing it. Technology has many challenges so it is important to remember that purchasing it is just the first step in becoming a more efficient organization.
When it comes to a new business and technology I feel the cost of the technology needs to be looked at two ways. The first is can the organization afford to purchase whatever the technology is. If an organization finds the absolute perfect software to manage its inventory but spending the money on the software will leave the company in such a financial position that they will not have the ability to pay other bills there is no benefit. The other side of the cost effectiveness of technology is the return on investment. Companies have all kinds of return on investment they need to hit to spend money on something and that is ok. As a new company you do need to make sure that the things you spend money on will give you a positive return on your investment otherwise you probably should not spend the money. The one real exception to this is if this technology is something that your business can not exist without, such as a restraint cannot exist without an oven. This leaves an organization with the knowledge that technology for the sake of technology is no good there has to be a benefit or a return on your investment to make a purchase worthwhile.
Social Environment
The social environment that an organization is starting out in is important to understand if you want to be as successful as possible. As the second generation owner of S.C. Johnson, H. F. Johnson Sr. said in his 1927 profit sharing speech ???The goodwill of the people is the only enduring thing in any business. It is the sole substance??¦the rest is shadow.??? If a new organization uses this philosophy in its dealings with its own workforce, customers and the community it operates in it will have a better chance of surviving then one that does not.
Diversity in the United States is a fact of life and companies that understand that have a better chance of being successful. Diversity in a workforce brings more experience, knowledge and opportunity to an organization. Companies that do not take advantage of diversity are not giving themselves all the opportunity to succeed that they should.
Society has trends that are an important part of business and if a company understand these trends then and uses them to their advantage they can grow rapidly. A good example of this is Jane Fonda and the trend of exercising; she was in the right business at the right time and used that to have an incredibly successful line of exercise videos. This trend has lasted a long time but most trends have a shorter lifespan so it is important to understand them and where they are in their life cycle. A business who strives to understand society??™s trends will usually find itself with a plan to take advantage of them.
A new organization that strives to be a good neighbor in the community it exists in is being smart. Small things can make a large difference when a new organization is trying to get positive information out about itself. Generating positive information about any company is important and should never be taken for granted.
When it comes to competition every business wants to know what their competitors are doing, they in turn mimic that product or service but at a cheaper rate. The companies of today from the largest fortune five-hundred companies all the way down to the mom and pop shops are starting to gravitate away from quality of products and services that the consumers are starting to demand.
When it comes to starting and running a business a business owner has to have quality in mind over quantity and eventually when that business becomes bigger and there is more demand on their products or services that company must find a happy medium between quality and quantity to ensure the needs and or wants of the consumers are met.
The struggle between quality and quantity is a constant battle with business owners, especially entrepreneurs as a new product or service has to overcome great opposition from competition that has been well established in the market place in some cases that competition has been established for decades. The entrepreneurs must have a clear business plan in reference to dealing with stiff competition; their product must surpass customer expectations.
So in reference to jams and jellies the CEO of Cobblestone Orchard stated, that if a new business can offer consumers a wholesome jam that is not massed produced with a ton of preservatives in it. Consumers generally will pay the little bit higher price for the quality product. This is part due to the new business catering and thoroughly understanding the consumers??™ wants of having something healthier to give their children, which in turn that consumer will offer free advertising for the company by word of mouth to friends and relatives that this new product is the best way to go. The only down side to that is, the company now has set the standards of quality and expectations in which they must abide by at all times. Due to the extremely high standards they have set for their product and care they have put into the product. If the company deviates from that quality they set the standards for and have forgotten about that quality and exceeding consumer expectations they will lose money and customer base. The consumers will feel betrayed and let down by the company, that the company sacrificed their core values for bigger profit margins.
Another focal point on the competitive market is to exceed consumer expectations, if a new business offers the same old service or product at the same price and are not trying to wow the consumer they will not succeed in moving business to themselves; consumers will stick to their norm of spending and not venture out to see the competition. The new markets of today states that consumers want to be wowed with new fresh ideas that are high end but easy on the pocket book. As previously stated the entrepreneurs of today have to in order to be successful always have the edge over their targeted competition with the ???wow??? factor when it comes to new products.
The ???wow??? factor is achieved by always getting feedback from consumers positive and constructive, by listening to consumers, understanding their needs, wants, and or concerns a business can become very successful. When consumers buy a product or a service they are not only looking for the obvious purchasing of the product, but also the total shopping experience and if a business can offer a quality product with competitive pricing and an unforgettable shopping experience that business will take off.
The way a business can overcome the competitive field is to understand everything previously stated, but also companies have to empower their employees to aid in the consumer experience, as employees are a businesses frontline and even the face of a business. If employees have to go through the chain of command to please a customer it can take several minutes or even hours to get manager approval. However, if employees are empowered to make sound business decisions based on their initial thoughts, the consumer will have an all around more enjoyable experience. This can be evident anywhere where shopping is found one such example comes from entrepreneur and multiple business owner Jamie Patrick this entrepreneur owns four very different types of businesses, during an informal interview with him in regards to empowering his employees, he stated that all employees and employers must have an understanding that decisions can be made by everyone and backed up by the managers and owner/owners without fear of repercussions. What this boils down to is the trust in the employees that decisions for improving the customers shopping experience can be made at the time of check out or during shopping. This freedom allows the employees who are at the forefront of any business to make decisions that can improve and will pay the company back ten-fold, through the word of mouth from a customer and their positive shopping experience.
We have found through our interview with Jamie and from personal experiences there are a number of things that have to be considered when starting a business, a few of these components are the economic and legal, technological, social, and the competitive. By entrepreneurs taking these things into consider they will increase their business??™ chance of becoming successful.

Johnson, H. F. (1927.). SC Johnson-Our Philosophy. Retrieved July 6, 2009, from

Merriam-Webster Dictionary. (n.d.). Retrieved June 27, 2009, from

Nickels, W.G., McHugh, J.M., & McHugh, S.M. (2008). Understanding business (8th
ed.). Burr Ridge, IL: Irwin/McGraw-Hill

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Financial Modelling

Category : Articles

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Introduction to Financial Modeling


hat is a financial model What is the difference between a financial model and the spreadsheet solutions you create or VBA programs you write all the time to answer financial questions or solve financial problems A simple, practical answer is that a financial model is designed to represent in mathematical terms the relationships among the variables of a financial problem so that it can be used to answer ???what if??? questions or make projections. Some of the spreadsheet solutions that people create capture some of these relationships as well and, therefore, can answer ???what if??? questions to some extent. But because they are not primarily designed with these objectives in mind, they do not try to capture as many of these interdependencies as possible, and their structures often make it cumbersome to answer ???what if??? questions or make projections with them. This may sound a little abstract. So let us look at a simple, concrete example. Suppose you are using a spreadsheet to calculate, based on your taxable income, what your after-tax income was last year. Income tax rates vary in steps (brackets) for different income levels. So you cannot simply calculate your taxes by multiplying your taxable income by one tax rate (30%, for example) and subtracting it from your taxable income to get the after-tax income. Consider two approaches to setting up a spreadsheet to calculate the aftertax income. In the first approach, you can enter your taxable income in a cell, calculate the tax on the income (using a hand calculator and the tax rates for the different tax brackets), and enter it in the cell below. Then you can write an equation in another cell to calculate your after-tax income by subtracting the tax in the second cell from the taxable income in the first cell. This spreadsheet solution will give you the answer to your immediate question, but it is not a useful financial model. Why Because it does not capture the key mathematical relationship between taxable income and taxes. The result is that if you now try to answer the ???what if??? question, What would my after-tax income have been if my taxable income were $10,000 higher, you will have to go back to doing the calculations by hand.


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However, you can set up your spreadsheet to calculate the taxes on any taxable income (using the different tax brackets and tax rates) and use the computed tax number to calculate your after-tax income. You will then have a financial model, because it will capture the relationship between taxable income and taxes. You also will be able to use this model to answer the ???what if??? question I posed before. In creating financial models, you always have to keep in mind that you want to capture as many of the interdependencies among the variables of the model as possible. In addition, you want to structure your models in such a way that it is easy to ask ???what if??? questions, that is, change the values of the independent variables and observe how they affect the values of the key dependent variables. You also should recognize that some of the relationships, as in the case of taxes, are easy to establish and exact; but many others will be approximate or even unknown. You will have to come up with them based on financial theory, analysis of data, and so on, and coming up with these relationships is one of the major challenges of financial modeling. Generally, the more of these relationships you can come up with and incorporate into your model, the more useful your model will be.

My Assumptions about You and the Users of Your Models
In this book I assume that you know the basics of finance and can solve by hand most of the problems for which you will be creating models. I also assume that you are familiar with the basics of Excel and have experience creating spreadsheet solutions to at least simple problems. You do not need to have knowledge of Excel??™s advanced features or of modeling; I will cover both in detail. You also do not need to have any knowledge of VBA. A key objective of the book is to teach you VBA and modeling using VBA from scratch by way of an easy and effective method. Another important assumption I am making is that you will be developing the models primarily for your own use or for use by people who have some experience with Excel, but not necessarily with VBA. When you create models for use by people who have little or no familiarity with Excel, it requires adding special user interfaces to make the models easy to use. One must build into them special features to make them ???bulletproof?????”that is, to make sure that the models will not crash or produce wrong results if someone enters inappropriate inputs. I will discuss some design methods and Excel features that make models easier to use and more ???bullet-resistant.??? Most everyday modelers do not need to go beyond this.

Excel and VBA as Modeling Tools
Even in the mid- to late 1990s, Excel was not considered a powerful enough tool for serious financial modeling, in part because the PCs available at the time had

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Introduction to Financial Modeling


speed and memory limitations. With advances in PCs and improvements in Excel itself, the table has now turned completely: Excel has become the preferred tool for creating all but the largest and most computationally intensive financial models. The advantages of Excel for financial modeling are so obvious that it is not necessary to go into them. However, for those who have not worked with other programs or programming languages for modeling, it is worthwhile to point out that one of the important advantages of Excel is that with Excel you can create excellent output with very little work. You should learn to take full advantage of Excel??™s power in this respect. If Excel is so good, then, why bother with VBA VBA is a programming language, and if you do not know anything about programming languages, it will be difficult for you to appreciate the advantages of VBA at this point. Let me touch on only a few key reasons here, and I will answer the question in greater detail when we discuss modeling with VBA. Despite its power, Excel has many limitations, and there are many financial models??”some even relatively simple ones??”that either cannot be created in Excel or will be overly complex or cumbersome to create in Excel. What??™s more, when you create a highly complex model in Excel, it can be difficult to understand, debug, and maintain. VBA generally offers a significant edge in all these respects. The problem that most people have with VBA is that it is one more thing to learn, and they are somehow afraid of trying to learn a programming language. The reality is that if you follow the right method, learning a programming language is not particularly difficult??”especially if you selectively learn what you will really use (as we will do in this book) and not let yourself get lost in all the other things you can do with VBA but probably never will. The truth is that you do not need to learn all that much to be able to create very useful and powerful financial models with VBA. What you will need is a lot of practice, which you will get as you go through this book. VBA offers you the best of both worlds: you can take advantage of all the powers of Excel including its ability to easily create excellent outputs, and supplement them with VBA??™s additional tools and flexibility.

Independent and Dependent Variables
We can say that the purpose of a model is to calculate the values of certain dependent variables for the values provided for its independent variables. It is therefore important to understand the difference between independent and dependent variables. Independent variables are also called the input or external variables. The model??™s user or creator inputs the values of these variables??”they are not calculated by the model. These are the variables you change to ask ???what if??? questions. For example, in our simple model the taxable income is an independent variable. A model may also include a special type of input variable called a parameter. Parameters are independent variables in that their values are also provided by the

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creator or user of the model. The difference is that their values are expected to remain constant or change infrequently within the context of the model. For example, the tax rates and the tax brackets in our simple model can be considered parameters of the model because their values have to be provided for the model to work, but these values are not expected to change frequently. As you create a model, it is useful to keep the parameters together but separate from the other independent variables. They should still be easy to see and change, however. The variables whose values are calculated by the model are called the calculated or dependent variables. Some of them may be intermediate variables, calculated for use in other calculations. Others are of primary interest to the user and are the output variables of the models. Models are almost always created to observe how the values of the output variables will change with changes in the values of one or more independent variables. Dependent variables are the ones whose values we want to project or determine when we ask ???what if??? questions. It is possible to distinguish between intermediate dependent variables and output dependent variables; intermediate dependent variables are used in further calculations, whereas output dependent variables are not. This is generally not a useful distinction, however. It is better to look at the dependent variables of primary interest as the output variables of the model irrespective of whether they are used in further calculations. One must also recognize that, from time to time, some dependent variables that were previously not considered output variables of a model can become so and vice versa.

Whether you are creating a financial model using Excel or VBA, you must take a systematic approach. A systematic approach always involves planning ahead and this takes some time. Most people do not like to plan and think they can save time by starting to build a model right away without spending time on planning. However, for all but the simplest models, not taking the time upfront to do some planning and not taking a systematic approach ends up being both frustrating and a waste of time. Here are the key steps you should follow in creating both Excel and VBA models. The details vary somewhat depending on whether you are working with Excel or VBA, and I will discuss them in later chapters. You should keep two other things in mind. First, in practice, you do not have to follow the steps strictly in this order, nor do you have to finish one completely before going onto the next one. Most of the time you will have to go back and forth to some extent. It will depend on the circumstances. Second, over time, you should try to create your own variation on this basic approach and learn to adapt it to different situations. Excel and VBA are flexible tools and you can usually make changes almost at any stage without a great deal of difficulty. But this still will take more time

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Introduction to Financial Modeling


than if you do it right the first time, and making changes later increases the chances of missing some of the other changes that have to go with them.

Step 1: Define and Structure the Problem
In real life, problems rarely come neatly defined and structured. Unless you take the time upfront to define and structure the problem and agree on them with the user (your boss, for example), you may end up having to extensively change the model you first create. When your boss asks you a question whose answer requires developing a model, she often has only a vague idea of what she is really seeking. As a finance person and a modeler, you are responsible for putting it all in more concrete terms before proceeding. Start by discussing and defining why the model is needed and what decisions, if any, will be made based on its output??”that is, what questions the model is supposed to answer. Then establish how accurate or realistic the outputs need to be. As we discussed, all models have to capture the relationships among their variables, and discovering and quantifying these can take a lot of time. How much effort you put into doing this should depend on how important the project is and how accurate or realistic the outputs need to be.

Step 2: Define the Input and Output Variables of the Model
Make a list of all the inputs the model will need and decide who will provide them or where they will come from. This is crucial. For example, if you are creating a model to do the business plan for your company, the inputs must come from the business managers. You cannot just guess what sales growth rates they will be able to achieve, how much they will have to spend on plants and equipment to support those sales growths, and so forth. You may not need the actual numbers upfront, but the list of inputs should be established based on your discussions with the business managers so that you can make them independent variables in your model. Otherwise you may have go back later on and change a lot of things in the model. Make a list of the tabular, graphical, and other outputs the model needs to create. To some extent, these should be driven by the decisions that will be made based on them. One advantage of Excel is that a lot of the output can be just printouts of your spreadsheets, provided the spreadsheets have been laid out properly. If you plan ahead and lay out your spreadsheets with the outputs in mind, you will save yourself a lot of time later on.

Step 3: Decide Who Will Use the Model and How Often
Who will use the model and how often it will be used make a lot of difference. In this book, I am assuming that you are developing the models either for your

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own use or for use by others who are familiar with Excel and understand the model, at least to some extent. When you create models for others??™ use, it involves much more work. You have to make sure that these people cannot enter data that do not make sense, they cannot accidentally damage parts of the model, and they can get the necessary outputs automatically and so forth. These are collectively called the user interface, and the more elegant, more easy to use, and more robust you want to make a model, the more work it is. You also have to plan for many of these features ahead of time. How frequently a model will be used is another important issue. If a model is going to be used only once in a while, then it does not matter if it takes a long time to run or if it takes some extra work every time to create the outputs. A model that will be used frequently, however, should be designed differently.

Step 4: Understand the Financial and Mathematical Aspects of the Model
It is important to remember that the computer cannot do any thinking; you have to tell it exactly how all the calculations in the model will have to be done. In most situations, if you do not know how you would do the calculations by hand, you are not going to be able to write the necessary formulas or instructions for the computer to do it. It does not pay to start building the model until you are sure you could solve the problem by hand. It usually takes beginners a lot of time to create a model and they often think that it is their Excel or VBA skills that are slowing things down. This may be partly true, but at least as often the problem is in their understanding of the finance and mathematics of the model they are trying to create. You will save lot of time if you do not even sit down in front of the computer to create a model until you are sure that you know how to solve the problem.

Step 5: Design the Model
There are two aspects to designing a model. One is to sketch the steps that Excel or VBA will have to follow to solve the problem. For simple models, you may want to write down only the broad steps or perhaps even do it in your head. For more complex problems, however, you should work on paper and use a degree of detail that suits your level of experience and the complexity of the problem. The less experience you have, the more detailed the sketch should be. Once again, remember that this may seem like a waste of time, but ultimately it will save you time compared to plunging into your spreadsheet or VBA program without such a sketch of the model. The other aspect of design is planning how the model will be laid out in Excel or VBA. Are you going to do the entire model in one spreadsheet (or VBA module) or split it into several spreadsheets (or VBA modules or procedures) Editing an Excel or VBA model is easy. So you do not have to decide every detail ahead

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Introduction to Financial Modeling


of time, but you need to have an overall design in mind or on paper depending on the complexity of the problem and your level of experience. As I discussed before, you also need to think about the kind of user interface you want to create and the reports you want the model to produce.

Step 6: Create the Spreadsheets or Write the VBA Codes
For most models, this is the big step. Most of this book covers the details of this step, so there is no need to get into them here.

Step 7: Test the Model
Almost no model works correctly the first time it is used; you have to find the problems (bugs) and fix them. The bugs that prevent the model from working at all or produce obviously wrong answers are generally easier to find and fix. However, models often include hidden bugs that create problems only for certain values or certain combinations of values for the input variables. To find them, you have to test a model extensively with a wide range of input variables. You have to take somewhat different approaches to testing and debugging a model depending on whether you are working with Excel or VBA. Both Excel and VBA provide some special tools for this purpose; I will discuss these tools and provide suggestions on how to debug models in Excel and VBA in later chapters. Here are a few helpful hints that apply to both:

There is no standard approach to testing and debugging a model. You almost always have to use your ingenuity to figure out what will be the best way to test and debug a particular model. Your ability to do so will improve with experience. The better you understand a problem and a model, the easier it will be to debug it. If you understand how changes in certain independent variables affect the values of certain dependent variables, then you can change the values of the independent variables to see if the dependent variables are changing in the right direction and by the right orders of magnitude. This is one of the best tools, especially for debugging large models, and you should do a lot of testing using this approach. You can also use this approach to hunt down the sources of the problems: Starting from a value that looks wrong, backtrack through the values of the intermediate dependent variables to see where the problem may be originating. This approach may sound somewhat vague and abstract, but with experience you will find that you can locate and fix most bugs rapidly using this approach. Checking a model??™s output against hand-calculated answers is a common and effective approach to debugging. In some situations, doing hand calculations may not be practical, but you may be able to use Excel itself to do some side calculations to test individual parts of the model.

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8 Step 8: Protect the Model


Once you have completed a model, and especially if you are going to give it to others to use, you should consider protecting it against accidental or unauthorized changes. In addition, you may also want to hide parts of the model so that others cannot see certain formulas, data, and so on. Excel provides several flexible tools that you can use to hide and protect parts or all of your model. A good strategy is to cluster and color code all the input cells of a model and protect and hide everything else in the workbook. There is less need to protect VBA modules because most users do not even know how to open them. Nonetheless, if you think it is necessary, you can protect parts of your VBA models as well.

Step 9: Document the Model
Documenting a model means putting in writing, diagrams, flowcharts, and so on, the information that someone else (or you yourself in the future) will need to figure out what it does, how it is structured, and what assumptions are built into it. One can then efficiently and effectively make changes to (update) the model if necessary. For large systems (for example, the reservation systems for airlines), the amount of necessary documentation can be enormous; it is often put on CDs for easy access and use. Professional system development organizations have elaborate standards for documentation, because different pieces of large systems are developed by different people??”many of whom may not be around for very long. Also, it is almost certain that the systems will have to be constantly updated. Over time, anyone who creates models develops his own system of documentation. As long as you keep in mind the objectives I mentioned before, you have a lot of leeway to come up with your own system as well. Both Excel and VBA offer a number of features that let you easily do a lot of the documentation as you work on your model. You should take full advantage of them and do as much of your documentation as possible while creating the model. This is important for two reasons. First, if you write your documentation when things are fresh in your mind, it will save you time later and you will be less likely to forget to document important things. Second, everyone hates (or learns to hate) documentation. It is no fun at all, especially if you try to do it all at once at the end of the project. If you do not work on the documentation until the end, chances are you will never do it. Then, if you have to use the model again a few months later or have to update it, you will end up spending hours or even days trying to figure out what you did. Do your documentation as you go along and finish it immediately after your model is done. You have to take somewhat different approaches to when you document Excel and VBA models. I will discuss how in the appropriate later chapters.

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Introduction to Financial Modeling


Step 10: Update the Model as Necessary
This is not a part of the initial model development, but almost all models require updating at some point, either because some things have changed or because you want to adapt it to do something else. This is where the documentation becomes useful. Depending on how much updating is involved, you may want to go through all of the above steps again. You should also thoroughly update the documentation and include in it the information on who updated it, when and why, and what changes were made.

To use this book effectively, it will be helpful to understand some of my thinking behind its organization. Modeling is a skill that you can develop only by creating a variety of models. Once you have developed the basic skill, you should be able to create increasingly complex models??”as long as you understand the finance and mathematics of the underlying problems. In some ways, it is like learning a language, especially when you are working with VBA. Once you learn the language, you can say new things in that language??”you can make up sentences that you have never heard before. I therefore emphasize learning the language by exposing you to a variety of models in different areas of finance instead of concentrating on one particular area like derivatives or trying to anticipate and include every model you may need to develop. For both Excel and VBA, I have provided one part that covers the ???grammar??? of the language (Parts One and Three) and then a second part that provides the examples of its use (Parts Two and Four) to create models. Just as you do not need to know everything about the grammar of a language before you can start using it, you do not need to know everything about Excel or VBA before you can start creating models using them. I suggest that you start with Part One to become familiar with Excel and quickly move on to working on the models in Part Two. Do not spend a lot of time trying to master the grammar. Come back and learn it as you need it. In each chapter in Part Two, I have included a section called ???Review of Theory and Concepts.??? These are the theories and concepts of finance that you will need to work on the models in that chapter. If you are familiar with them, you can skip them and go on to the models. If you want to refresh your memory and understanding, the material is there. You will notice that many of the modeling chapters in Parts Two and Four have the same titles. There is a reason for including such parallel chapters. It has been my experience that the easiest way to learn modeling with VBA is to start with problems that you can already model in Excel, because then you already know a lot about the problem and you can focus on the VBA aspects of it. In

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many cases, the parallel VBA models also demonstrate that even if you can model a problem using Excel, using VBA can provide additional flexibility, power, and so on. Most of the VBA chapters include additional models that are cumbersome or impossible to create using Excel. What this means is that you may be better off covering Parts One and Two before you go on to the VBA parts. However, if you are already good at modeling with Excel and are primarily interested in learning VBA and modeling using VBA, you can start with Part Three. Then, as you cover the chapters of Part Four, you can review the corresponding chapters in Part Two as necessary. Because there are certain differences between Excel-based models and VBAbased models, I have provided in the first chapters of both Parts Two and Four additional information on how to develop good models using them. I have also included suggestions on how best to use the material in both parts to improve your modeling skills rapidly. You will progress faster if you read and follow these suggestions instead of taking a haphazard approach.

  • -

Business Sources and Nature of Change

Category : Articles

Executive Summary
JB HI FI is an electronics store that has through its management adapting to change has been a success which is shown through its market share in that area. JB HI FI??™s Dominates stems from it identifying the need for change, setting achievable goals and its business culture.

This report will:
* Describe the sources and the Nature of change being experienced by business.
* Analyse how effective management has been in managing the change.

Sources and Nature of change

Nature and sources of change in a business result from either external or internal influences. External factors that influence a business are those that are generally outside of its control as internal influences are those which the business has greater control over. These forces of change have resulted in new responses and strategies from management of JB HI FI.

External influences
There are many external influences on JB HI FI. Since external factors cannot be controlled by the business it therefore needs to adjust operations in order to manage such external changes.
The changing nature of markets
Markets are dynamic. Consumer??™s wants are constantly changing. JB HI FI have noticed the consumers shift of expensive ???Out-of-home??™ purchases such as holidays to value for money ???in-home??™ purchases because of the recent period of economic uncertainty. Due to this JB HI FI has built on their reputation of ???everyday low prices??™ to capture the shift in buyer behaviour.
Economic and Financial
Economic forces have impacts on the business??™s capacity to compete and customers??™ willingness and ability to spend. The Australian dollar has fluctuated from US$0.68 July 2008 to a recent high of parity with the US dollar in October 2010. This has had limited influence as JB HI FI does not import directly and in Australian dollars from LG and Samsung. The recent high in the Aussie Dollar has resulted in cheaper goods which have been passed on to customers. They??™ve used hedging to protect their capital from much effect of inflation.
Two major factors which will impact Australia??™s business activity is its location within the Asia Pacific and the growth in Asian nations which provides challenging opportunities for business expansion, sales and profit. Changing demographics factors influence a business??™s which lead to changes in demand levels and the nature of products and services. JB HI FI has adopted a growth strategy which is opening smaller shop front stores in shopping centres with smaller populations. They have a similar expansion in New Zealand markets which has brought geographical as well as financial diversity to the overall enterprise.
Businesses need to respond to social and cultural changes as they provide new demands and opportunities which majorly impact on business success. This may include changes in beliefs, spending habits, work attitudes and business ethics.
The process of deregulation and regulation have in Australia have changed the way businesses must operate. Businesses have to follow laws such as environmental, consumer protection, OH&S which impact on how they operate. Music retailers in general have been hit by illegal downloading JB HI FI have included iPods in their product line to offset lose of profits in CDs and now is Australia??™s largest IPod seller.
All organisations are required to interact with governments as they pay tax to them and are subject to government regulation. The ACCC and the ASIC are two of the government??™s regulators. A recent government handout of $900 has resulted in smoothing there revenue during the economic downturn.
Technological developments
New Technological advances have continually changed the way the businesses operate. New technologies have opened new markets JB HI FI have included the latest technology in their product mix to make sure they are a leader in new consumer technology.

Internal influences
Internal change rises from the desire to develop new and improved ways of doing things. Businesses have high degree of control over the internal environment.
Effects of accelerating technology including e-commerce
Before the internet all businesses were carried out in Brick and Mortar shops. Now that the internet in a common within homes, many businesses have launched and operate virtual shops. JB HI FI combines a physical store and online web-enabled shop which has increased their market share.
New systems and procedures
New systems and procedures are generally implemented to improve productivity. JB HI FI implemented wireless handheld computers to increase the stores productivity of in-store sales and services.
New business cultures
JB HI FI??™s behavioural approach to management has fostered a culture of change which allows them to constantly respond to the dynamic workplace, this culture of change is supported by employees who are passionate about their work which contributes to the decision making consumers make about buying their products.
Structural responses to change
Businesses outsource to reduce costs and increase productivity. JB HI FI outsources its ???interest free??™ deals to HSBC bank as it is easier for them to deal with loans as they are specialist and can do a better job for consumers in that area.
Flat structures
The flattening of the business has resulted in fewer layers of management and a widening of span of control. The stripping back of the management layers is aimed at cutting costs and speeding up decision making to make JB HI FI more flexible and adaption to change.
Strategic alliances and networks
There is a strategic alliance occurs when two or more businesses join together combine their resources. JB HI FI has a strategic alliance with HSBC bank which is described above. JB HI FI??™s network structure includes electrical brands such as LG and Samsung as they provide the products JB HI FI sell as they don??™t produce the products themselves.

Managing change effectively
Identifying the need for change
Effective managers should always be scanning the environment, attempting to understand factors that will have an impact on the business. JB HI FI management noticed that their employees were spending great deal of time manually entering sales and checking price lists and catalogues. They identified the need for a more productive way to manage in-store sales and services. JB HI FI management was very effective in noticing the need for change contrasts to QANTAS which identified the need to change to cut down costs from high fuel prices, severe global downturn and competitor growth in all markets.

This strengthens the business so it may take full advantage of opportunities that favour its long-term survival in an increasingly competitive world.

This has impacted on the JB HI FI stakeholders. This has affected the consumers in a positive way as it has bettered the service they provide to them. LG and Samsung stakeholders have benefited from this as their products information can be found quicker and portrayed to the consumer which will mean increase in their sales. This has affected positively to the share owners as because of their increased profit it has contributed in the share price??™s growth. 2006 is when they noticed the need for change where the share price was $4.94 to $15.40 in 2009 this provides some evidence that identifying that JB HI FI has been effective in managing change.

Qantas on the other hand contrasts as due to its management not being effective in managing change in the global downturn has resulted in its shares dropping from $5.83 peak in 2008 to a recent $2.67. This has impacted negatively on share holders of Qantas.

Setting achievable goals
For change to be managed effectively it is essential that new goals are to be achievable. This means goals that are attainable and realistic. Unachievable goals will only cause cynicism among employees and damage relationships between employees and supervisors. Goals devised after consultation with employees and communicated clearly by management, have a much greater chance of being realised.
Management of JB HI FI decided that they should implement an electronic system for in-store sales and services. They set the goal of deploying 1500 wireless handheld computers in all their stores within 18 months. This goal can be classified as a ???smart goal??™ as it is specific, measureable, achievable, and realistic and timed.
This is similar to Qantas as they also set ???smart goals??™ after consultation with employees communicated clearly with their management. Consultation uses effective management skills which will help ensure the success of business entity.
Negative short term effects are less profit in the immediate future as they need money to buy and deploy the units and decreased productivity from training staff. Positive short term is increased morale from staff and customers see the increased effort to better their service for them which creates consumer happiness, new stakeholders who provide the technology.
Negative long term effects are it may lose the formula the makes JB HI FI great and my never be able to get it back. Positive long term effects are increased profit, better customer satisfaction which leads to higher share price which will overall satisfy stakeholders.
Evidence that supports this was when they started to implement them from 2006 to 2007 profit only increased 27% opposed to from when they finished implementing them in 2007 to 2008 which profit increased 43%.
Creating culture of change
Adopting changes to work procedures or organisational structures requires a degree of risk taking by the participants. For employees and managers to be prepared to take such risks the business culture needs to be supportive. A change agent can be used to make the change easier.

JB HI FI had already created a culture which embraces constant change and new technologies. Therefore, the employees were open to a new electronic system and procedure for in-store sales and services.

Qantas differed as they had to create this change to do this they had change agents, whom they take responsibility for managing the change process.

Catalysts, solution givers, process helpers and resource linkers are all used to change a culture.

JB HI FI??™s ready culture to adapt to change has made the goal easy to achieve which has resulted in sustained profits as it didn??™t drag out longer than needed and the willingness of the staff made it faster which limited costs for training as the staff wanted to learn.

Force-field analysis
Driving forces for wireless handheld computers for in store sales and services:
* Increased sales and efficiency
* Improved stock control
* Improved customer service
* Enhanced communications with staff
Restraining forces for wireless handheld computers for in store sales and services
* Financial costs- Purchasing new equipment, software, setting up wireless networks and retraining staff.
* Staff- having to acquire new skills
The driving forces outweighs the restraining forces
Lewin??™s unfreeze/change/refreeze model
After the force-field analysis JB-HI-FI was able to effectively implement the change through the unfreeze/change/refreeze model.
* Testing various handheld computers
* Selecting software
* Trailing in several stores
* Training employees
* Deploying the handheld computers in all stores
* Installing wireless networks in all stores
* Continual training employees
* Providing technical support for new system
* Continually updating software
* Maintaining and repairing computers
In conclusion a business has many factors influencing it to change including external and internal. If the business manages change effectively like JB HI FI has and QANTAS in some instances have they will succeed in today??™s ever changing market. If they don??™t have the willingness to change they will increase their chances of failing enormously.

  • -

Financial Markets

Category : Articles

Financial Markets

What you learn in the topic:
Financial Products ??“ Shares
Financial intermediaries ??“ banks
Reserve Bank of Australia
Interest rates (cash rates)
Australian Securities Exchange (ASX)
Exchange rate
Non-financial intermediaries – Insurance comp
Money supply

The Role of the Financial Markets
Financial markets perform the essential economic function of channelling funds from those with excess funds (savers), to those who have a shortage of funds (lenders).
Financial intermediaries are firms that receive the accumulated funds of savers, and then make loans out to lenders.

Sources of saving
The proportion of household income not consumed on goods and services. Y = C+S
Profits retained by business. Generally private firms.
Government budget surpluses.
Funds from overseas lenders.

Reasons for borrowing
Consumer borrow to pay fro excess consumption or finance large purchases such as a house or car.
Business borrow to finacne expansion.
Government borrow to finance a budget deficit.
Australian financial institutions lend money to overseas borrowers.

Factor Market for capital
Capital (Money capital is required by businesses as an input into the production process to make good and services.
Savings from various sectores is not only used for futures consumption, but also to invest in captal, which increase the productive capacity of the economy .

The Financial Sector
Consists of a wide frange of financial institutions.
Employs around 400,000 people.
Provides may different services including; Mortgages, credit cards, personal loans, superannuation, insurance and investment advice.
It contributed $130 billion to GDP (gross domestic product) 2010-2011. E.g. mining and tourism

Primary Financial Markets
Is where financial securities such as debt, shares, bonds and options are sold for the first time for raising capital.
Securities are any form of financial instruments, that provide the holder of that instrument with a claim over real assets or a future income stream.
An example of a primary market is the ASX- Australian Securities Exchange.

Secondary Financial Markets
Is where financial securities that have already been acquired through a primary and resold to another investor.
Financial instruments sold through these markets are subject to the forces of supply and demand.
Companies whose securities are traded on these markets do not receive any money from these transactions.

The Main Financial Markets
The Share Market: Ownership shares in companies are issued or exchanged.
The Debt Market: Where debt securities are exchanged or cash lent/borrowed.
The Derivatives Market: Where people buy and sell financial assets that are based on the value of other assets.
The Foreign Exchange Market: Where financial asests defined in 1 countrys currency are exchanged for asests defined in another countrys currency.

Type of Financial Markets
Financial Intermediaries or banks: Accept savings deposits from households, offer all financial services (credit cards, safe-deposit services and loans).
Non-bank Financial Intermediaries: Offer most services that banks provide, include finance companies, investments, banks and credit unions.

Other Financial Institutions
Finance companies: Borrow from general public through issuing debt securities, then funds re-loaned out at higher percentage. E.g GE money/
Investment Banks/Merchant Banks: Borrow from companies with excess funds and lends to other companies.
Credit Unions: are non-profit, co-operative organisations whose members belong to a particular trade, profession or industry. E.g. Teachers union and builders union.
Permanent building societies: Accept deposits from the public and provide funds for home loans.
Mortgage /Originators funds: Obtained money from financial markets to end out with flexible repayments and low percentage rates. E.g. Rams
Superannuation funds: receive contributions from members and invest in financial assets.

Textbook- page 174.
Investigate the level of competition in Australias financial markets: The increased competition in financial markets will improve the allocation of resources throughout the economy. Australias banking sector is highly concentrated with the large banks in Australia, such as ANZ, Commonwealth Bank, NAB and Westpac, overriding the markets for deposits, home loans and other lending. Foreign banks hold a greater amount of shares in a household deposits and credit cards, these only take up a small percentage in the Australian Market.
Discuss which financial products might be required in the following circumstances and what financial institutions might be involved:
a. A parent is slightly low on cash at Christmas but still wants to buy a range of presents for the family. Consumer credit. b. Teletra needs to borrow $10 million for 72 hours. Short term c. A small business wants to finance the purchase of a new company car. Business loan.

Movie: An introduction to investing in the Share Market

What is a share Shares is part ownership of a business.
What does going public mean Being listed on a public shares and the public is able to buy part of a company.
The buying and selling of company shares takes place where Takes place through the Australian stock exchange.
When was the ASX (Australian Stock Exchange) formed 1987 by dominating the 6 states of shares markets.
List the types of shared available for people investing Income shares, blue chips shares, growth shares, cyclical shares and defensive shares.
Name the ways people can buy shares Online or orders are placed by licensed brokers.
What are the advantages of professional advice Know the market, possible returns, guide you in the direction of successful companies and industries which are making a good income.
Whats the biggest single driver of shares prices Whats happening in the economy, regardless on the price of share, its the industry of the shares your investing in.
When does a trade occur Little bets and plays on a number of shares, rather than big bets on specific shares because you would normally get burned than gain money.
What is the main reason for investing long term You decide how much money you want to put into a business and the way you can become seriously wealthy, , taking a punt on interest rate droppings, (short term- scared of the economy going down and can easily get out).
Define dividend, dividend yield Dividend- Is what the company pays with shares holders. Dividend yield- Is the dividend as the percentage of the price.
What is the calculation of the price earrings ratio
Has to do with profit not dividend.
Price earnings ratio = share price ———————— earnings per share

Research Task:
Websites:[email protected]/Lookup/1301.0Chapter27092009??“10

Research the cause of the global credit crisis in 2007-2008 and its impact on the stability of the Australian financial system.

There was a massive loss of confidence in the US financial system throughout 2007-2008. The main cause of the global financial crisis in 2007-2008 was the extensive increase in the number of US homeowner??™s which had taken out sub-prime loans in which were unable to pay on their mortgage payments. This system quickly started to collapse as the loan defaults spread throughout the entire US financial system.

With a large number of borrowers defaulting on loans, banks were faced with a situation where the repossessed house and land was worthless on today??™s market than the bank had loaded out originally. The credit crunch had impacted towards US banks ??“ this was where the banks had a liquidity crisis on their hands, and giving and obtaining loans became increasingly difficult as the fallout from the sub-prime lending bubble burst.

The long-established US global investment bank, Lehman Brothers, collapsed, filing the largest bankruptcy in American history. The US government was forced to step in and provide a rescue plan of approximately US$700 billion (A$845 billion) to prop up other failing financial institutions. In the space of a few days, hundreds of billions of dollars in value had been wiped off the New York Stock Exchange.

In January of 2009 US President Obama proposed federal spending of around $1 trillion in an attempt to improve the state of the financial crisis. The repercussions of this financial meltdown sent shockwaves through the world??™s financial systems and stock markets. What started as a financial disaster quickly developed into an economic crisis. World stock markets collapsed and world economic growth and trade severely declined with a consequent increase in unemployment.

Expansionary economic policies were needed to act as a buffer against the deteriorating global conditions. In October 2008 the Rudd government announced that it would guarantee bank deposits. With the economy facing a recession, governments of the rich nations launched economic stimulus packages in order to pour millions of dollars into their economies. The Rudd government injected about $53 billion into the Australian economy through two budgetary measures. This included payments to seniors, carers and families.

The payments were made in December 2008, just in time for Christmas spending, and retailers predominantly reported strong sales. The first homebuyers grant was doubled to $14,000 for existing homes, and tripled to $21,000 for new homes.

These packages contained a mixture of immediate stimulus to encourage consumer spending and longer-term infrastructure projects. The government action shielded the Australian economy from the worst of the global recessions.

The effect of the crisis on Australia has been significantly less than other countries effected by the GFC. The Australian economy had better growth outcomes for bank loans than other developed economies for example the United States and United kingdom. Other countries experienced a bad decline and increase in unemployment rates. The Australian financial system was stronger than other countries, this meant that Australian banks didnt require any government funds.

The main effect of the GFC in Australia was the collapse of the Australian dollar- $0.98US in July 2008 to $0.60 in October 2008. This dramatic fall in the overall value of households property was between 13% – 14%; a decrease in household buying, an increase in the households saving rates was between 1.2% March 2008 to 8.5% December 2008 also decreasing the unemployment rate. The reasoning of decreasing prices of households was due to the fact that if banks were to lend more money to shaky income earners, who had ambiguous credit histories, banks would face a higher debt and higher risk in falling into recession. Household owners were not willing to pay a large amount of money as they did not have enough income to pay back banks. Households were overpriced to begin with- real market price value price was low.

In February 2008 the unemployment rate increased from 4.1% to 5.8% August 2009, although it decreased to 5.3% in February 2010 according to ABS 2010. In this period manufacturing, construction and retail sectors lost their jobs compared to those in health and social departments increased in jobs. This occurred because consumers were unable to afford for the consumption of goods and services which led to a decrease in jobs regarding manufacturing, construction and retail sectors, however jobs regarding health and social increased because consumers were willing to spend money in these departments if needed. There was a decrease in full-time employment, an increase in part-time employment according to ABS 2009. These changes of employment in the labour market led to a decrease in the aggregate monthly hours worked. Monthly hours worked decreased from 1551 million August 2008 to 1518 million August 2009, in February 2010 monthly hours increased to 1538 million according to ABS 2010.

Domestic and Global Markets

Australian financial market is an important part of global financial markets. There are several:
Foreign Exchange Market: (Youtube- Forex- all introduction to forex trading) Enable the movement of funds around the world. Increasingly important since 1983 with the flow of the Australia dollar, it involves the trading of one currency to another. For example the Australian dollar decreased majorly, what impact will it have on the Australia People may not want to invest in the Australian dollar. Encourage tourism in Australian. Interesting Australia is the most 5th but only contributed 3-4% in world trade. The main reason why the Australian dollar is traded is because it will speculated.
Global debt Markets: (Youtube- Are important for Australias economic development because of its reliance on foreign borrowing.
Equity Markets: (Youtube- Are regarded by national governments so they exist primarily within individual counties.

(Youtube- Forex- all introduction to forex trading)

Regulation of financial markets

RBA- Reserve Bank of Australia (Monetary policy- interest rates/cash rate). The RBA is Australias central bank. Its main roles are to conduct monetary policy and oversee the stability of the financial system.
APRA- Australian Prudential Regulation Authority (Look after banks). ARPA os the government body established to regulate all deposits-taking institutions, life and general insurance organisations and superannuation funds.
ASIC- Australian Securities and Investments Commission. ASIC is the government body with responsibility for corporate regulation, consumer protection and the oversight of financial service products.
Treasury- Part of the government (policy, budget)Treasury is the Australian Government department responsible for development fiscal policy through the Federal Budget and advising the government on financial stability issues.

Financial Regulation
Share financial markets are critical for the functioning of the economy
Instability can undermine confidence and can have serve consequences for households and businesses.
Maintaining financial market stability through regulations is a key objective of government economic policy.

Financial Market Regulators
Reserve Bank of Australia: Responsible for monetary policy, payments system regulation and the stability of the financial system.
Australian Prudential Regulation Authority: Responsible for prudential supervision and regulation for all deposit-taking institutions, life and general insurance and superannuation funds.
Australian Securities and Investments Commission: Responsible for corporate regulation, consumer protection and oversight of financial service products.
Australian Treasury: Advises the government on financial stability issues and the legislative and regulatory framework for the financial system.
Council of Financial Regulators
It is a coordinating body for financial market regulation that provides for cooperation and collaboration among its four members – the RBA, APRA, ASIC and Treasury.
It is an informal body that allows information sharing and coordinating advice.

Wallis Committee
This committee is responsible for the current financial market structure that has been in place since the 1990s.
It recommended changes to regulation to keep pace with global changes in financial markets, including; new technologies increased competition.

The Reserve Bank Australia (RBA)
The RBA was established by Commonwealth Legislation in 1959, under the Reserve Bank Act.
It does not provide services to the general public.
It is not guided by profits or share markets interest access banks.

RBA Charter
According to the Charter, the RBA has 3 main broad objective:
1. The stability of Australias currency. (Main objective- engages in financial/foreign markets to keep the Australian currency at a specific level, act on behalf of the government to buy the Australian dollars to supplier)2. The maintenance of full employment. 3. The economic prosperity and welfare of the people of Australia.

Functions of the RBAA:
Prints and circulates currency ($A)
Monitors the circulation of cheques through banks.
A banker to the Federal Government.
It issues social securities.
Collects tax
Pays government employees.
Issues and redeems government bonds (securities).
Makes long term loans to business in the rural sector.
Prudentially supervises banks.
Monitors foreign exchange.
Attempts to influence employment, inflation and economic activity through its monetary policy.
Custodian of international reserves.
Banks may temporarily borrow from the Reserve Bank should they run short of funds.
This is know as the the lender of the kast resort facility.

Australian Prudential Regulation Authority (APRA )
APRA provides prudential regulation for authorised deposit-taking institutions.
Deposit taking institutions include: – Banks – Superannuation companies- Insurance companies- Credit unions – Building societies

APRAs Role
APRAs role is to ensure that deposits are able to be retrieved when they are desired.
APRA must ensure that organisations maintain adequate cash ratios to facilitate withdrawals.
APRA will investigate organisations, sort out financial difficulties and intervenue in these financial organisations affairs.

ASICs roles is to protect the Australian financial system.
ASIC constantly monitors and investigates the possible illegal actions of individuals and corporations who act to undermine the integrity of the Australian financial system

ASICs Role
ASIC is the primary regulator of corporations including their:
– Formation – Operation – Registration – Financial reporting

ASIC is alose the primary regulator of the Australian Stock Exchange.

Australian Treasury
It is the main source of economic policy advice to the government.
The Treasury can influence how th government devise budgets, collect taxes, allocate expenditure and implement other polices such as: Monetary Policy, labour market policy and market regulation.

Question time:
Research any key investigation with ASIC has recently been involved in or currently conducting

  • -

Business Simulation Alumina, Inc

Category : Articles

Business Simulation – Alumina, Inc.
Businesses in a global environment run risks and one of the strongest areas of government regulation of business is the Environmental regulation. Businesses have to conform and comply with regulations mandated by the government and if failed to do so can face penalties that can cost the company immensely and sometimes closure. These regulations are set forth for companies to avoid major disasters that can affect the environment (to include animals and humans).
Alumina, Incorporated, a $4 billion aluminum maker operates in the United States with subsidiaries in manufacturing automotive components and manufacture of packaging materials, bauxite mining, alumina refining, and aluminum smelting. Operates in eight countries around the world, and the United States market constitutes 70% of its sales. Alumina experienced legal issues made public. Five years ago, Alumina was in violation of environmental discharge norms in a routine Environmental Protection Agency (EPA) compliance evaluation. The EPA was established to administer federal laws that set standards for clean water, to specifying cleanup levels for toxic waste sites, to controlling air pollution from industries and other sources. EPA found Alumina to have the PAH concentration in test samples above the prescribed limit and therefore, a clean up was ordered in which Alumina promptly compiled, and the violation was considered corrected after a follow up audit. The company now falls under the control of the Environmental Protection Agency (EPA) of region 6. Alumina then faced a new allegation or claim of environment endangerment to the community with accusations from a local resident, Kelly Bates. Kelly Bates, a 38-year-old mother accuses company of repeatedly contaminating the waters of Lake Dira with carcinogenic effluents. As a result of the contamination it caused her child of age 10 to acquire Leukemia. Bates believes that there is a correlation between her daughters Leukemia and the first environmental violation of Alumina. Businesses must not ignore their environmental and social responsibility. Alumina must follow legal, social, and environmental regulations in order to be a successful company. Alumina has a responsibility to its communities and the government in which it operates. The damaging accusations from Bates were reported to Erehwon newspaper, which caused major concern to their executive management team; mainly because of the possibility of affecting Alumina??™s public image and its responsibility in complying with environmental regulations and issues. This was a legal issue that had the elements of a large-scale scandal and bad publicity, however, its management staffs had to approach the problem and act immediately and work closely with their legal counsel to downplay the accusations and do more research to ensure their PAH levels were in compliance before moving forward .
In the first part of the simulation, Legal Counsel and Public Relations Head discuss behind closed doors the editorial that claims of Alumina not possessing a good effective system. Roger Lloyd, Chair, believes that the accusation is baseless and although he agrees with Legal Counsel to proceed with immediate press release, in addition, needs to conduct an independent site evaluation to check for new violations and to disclose results to EPA. Results of independent study found that Alumina was under Federal guidelines for PAH in the ground. One negative feedback in generating an independent study can be that all information generated by the study would have to be made available in any future litigation issues between Alumina and the plaintiffs.
The next key factor in this simulation is the report by a leading American scientific society in its quarterly journal reporting that because of increased traffic in the heavily industrialized state of Erhwon the waters of Lake Dira are poisoned with polycyclic aromatic hydrocarbons (PAHs). Its concentrations have been found to be 100 times greater than pre-urban conditions and pose a danger to animal, aquatic, and human life (Legal Environment of Business, UOPX, 2011). Arthur Todd, Legal Counsel believes that Alumina has rendered Bates claim tenuous and that link between Alumina??™s violation and her child??™s leukemia has not been established therefore company has a chance to win in court. Though, Todd may have a point in regard to the possibility of winning in a trial, but needs to keep in mind the length of time and costs that can be incurred in a litigation process.
Another key fact is that EPA has notified Alumina of the consideration of disclosing information under the Freedom of Information Act (FOIA). This act allows any person a process in which to access any information or records held by government bodies. In reference to Alumina, Bates can request information from the Environmental Protection Agency (EPA) on their spill even if it was five years ago. However, Alumina has a right to with hold any information that the company believes is confidential business information. The courts would decide what is confidential and what is not. According to Todd, Legal Counsel, he recommends to consider releasing portions of the environmental audit report that pertains exclusively to the EPA??™s adjudication of Alumina??™s violation. To prevent the public eye from receiving disclosed information, Alumina should release reports pertaining to the case only. Opening up all files can lead the public to other cases, which the company is trying to prevent and correct.
The U.S. Environmental Protection Agency Compliance Incentives and Auditing policy is another key factor in this simulation. The EPA Audit Policy safeguards human health and environment by providing several major incentives for regulated entities to voluntarily come into compliance with federal environmental laws and regulations. The two main incentives to this policy are significant penalty reduction (75%) and no recommendation for criminal prosecution.
In conclusion, a company should always have a preventive, detective, and corrective plan for all matters. Tort liabilities and regulatory risks are very important and should never be overlooked. If torts and risks are presented to the company and the company fail to obey with local, state, and federal laws and policies it can affect the business through earnings, assets, and public image. Being proactive in keeping future violations from occurring will help Alumina from litigations. They need to keep in mind that by hiding information or making it difficult to obtain information regarding business practices could cause the community to fail to trust. With all corrective measures taken Alumina should stay in compliance with the EPA, FIOA, and prevent negligence occurrences.

Business Regulation Table

Legal Issues Legal Principles
5 yrs ago, Alumina was found in violation of not having effective systems in place to deal with the crisis (releasing 11 million gallons of crude oil into the pristine blue waters off the southern coast of Alaska), which resulted in acute embarrassment.

Kelly Bates alleges Alumina of repeatedly contaminating the waters of Lake Dira with carcinogenic effluents, which was the proximate cause of her 10-year old daughter??™s leukemia and may be as old as Alumina??™s first instance of environmental law violation. Bates allegation is bound to the hit Alumina??™s public image again
??? Arthur Todd, Legal Counsel ??“ believes Alumina??™s systems are effective & emission rate is way below the prescribed level, by using the best available technology for pollutant cleanup in compliance with the Clean Water Act.
??? Roger Lloyd, Chairman- believes the accusation is baseless and while he agrees with Legal Counsel to suggest an immediate press release, also feels they should conduct an independent site study to check for any new violations and disclose results to the EPA to take advantage of their self-policing incentives.
??? Diane Richards, PR Head- requests arrange a private investigation of Bates; though believes dangerous if word gets out; can have some liability for invasion of privacy. Feels the independent audit can be costly. Agrees in releasing news story immediately & thinks that speaking to Bates directly may not be bad either. Release news story highlighting efficacy of systems and clean record
Editorials talk about Alumina getting defensive and states that they may not have well effective systems
??? Arthur Todd, Legal Counselor- requests to demand a letter to ???The Erehwon Reporter??? demanding a retraction is in order, stating that Alumina has never violated any environmental laws ???willfully???
??? Roger Lloyd, Chairman ??“ recommends to conduct an independent study to check for any fresh violations and disclose results to EPA, as the EPA has incentives for self-policing including 100% penalty waivers for voluntary disclosure and correction of violation Ignore ???The Erehwon Reporter??? editorials and conduct an independent site study to check for any new violation.

Results show PAH levels are lower than the prescribed 5 milligrams per liter for all hydrocarbons; therefore, blunts Bates accusations of ???repeatedly contaminating the waters of Lake Dira???

If follow Todd??™s recommendation, if could send a message to the public that Alumina may be hiding something and lead to loss is profits
The Erehwon Reporter and Bates requesting EPA to release the environmental audit report which documented Alumina??™s violation of the ???Clean Water Act??? five years ago
Under FOIA, citizens have the right to request
??? Todd- states under the FOIA it is possible to withhold Confidential Business information; however, can consider releasing portions of the environmental audit report pertinent only to the EPAs adjudication of their violation
??? Roger Lloyd- objects to the disclosure of any information and feels that the newspaper has no business in snooping around; therefore, wants Legal Counsel to file an objection to the release of report based on Confidentiality of Business Information
??? Blake ??“ believes that the violation of Alumina 5 years ago was not intentional. He believes since it was Alumina??™s first instance in non-compliance, they should release the entire environmental audit report to the press and public and wait for reaction Allow partial release of environmental audit report
Alumina, Inc has to contend with the threat of a lawsuit claiming compensatory and punitive damages
??? Todd- believes that they should meet Bates in court since the link between Alumina??™s violation and leukemia has not established
??? Lloyd- recommends mediation through American Arbitration Association (AAA), since it is the quickiest and cheapest option in sorting out matters in court
??? Richards-recommends to negotiate with Bates and offer a trust fund and feels by doing this will improve the company??™s image Seek AAA intervention in resolving the dispute through alternative means

A win-win situation for both parties

Settlement without admitting any wrongdoing

Litigation too costly and can hurt company??™s image


Simulation. (2011). Business Regulation. Retrieved June 17, 2011, from the UOP rEsource

Cheeseman, H.R. (). Business Law. Legal Environment, Online Commerce, Business Ethics, and International Issues. Retrieved from



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Financial Markets

Category : Articles

Provide a brief review of the evidence concerning the information efficiency of the worlds major stock markets
Efficiency can be described as ???the ability to achieve desired result without wasted efforts or energy??? (Encarta dictionary, 2009).
In relation to financial markets, the measure of information efficiency can be assessed as being the speed with which security prices quickly and fully reflect all available information. Thus when information arises the news spreads very quickly and the effect is incorporated into the price of securities without delay. Investors are concerned with current or historic information since this influences commodity prices and so it follows that as more information becomes available the better informed the decision-making.
The implication for the investor is that he can rarely outperform the market whether through use of technical or fundamental analysis to achieve greater returns than those that could be obtained by holding a randomly selected portfolio of stocks at with comparable risk because the markets will have already reacted reflecting future developments in commodity prices. This is an important factor of financial markets and underpins market efficiency to the extent that the stability of major world markets relies upon it as a key constituent for building investor confidence and reducing the occurrence of market volatility.
Markets across the world are gaining greater efficiency as a result of improved information technology which allows huge amounts of information of varying degrees of complexities to be captured, disseminating and traded quickly on the markets. However there is a trade-off between time taken to receive the information and to have the information verified such that IT may inadvertently cause markets to be less efficient where price sensitive information is not acted on in a timely basis and thus profit opportunity is lost.
By contrast, Investopedia explains inefficient markets being evidenced where some securities are overpriced and others underpriced, which means investors can made abnormal returns/losses relative to their level of risk. Some investors have turned the gyrations of the financial markets into fortunes for instance Warren Buffet and John M Keynes whilst many other investors end up like Isaac Newton who after losing a bundle of stock exclaimed ???I can calculate the motions of the heavenly bodies, but not the madness of people??? (Larry MacDonald, 1998)
Evidence would suggest that markets cannot be entirely efficient or inefficient but a mixture seen as a mixture of both since if all participants in the market believed it to be efficient no investor would seek to make abnormal profits.

Secondly, provide a critical assessment as to whether or not the recent volatility in share prices and similar periods of extreme volatility (e.g. during the “dot com bubble”) provide evidence of the inefficiency of stock markets in valuing the companies quoted in their exchanges.
The efficient market hypothesis is associated with random walk theory whereby share prices and all subsequent changes represent random departure from previous prices. Thus if information flows unimpeded and is immediately reflected in stock prices then tomorrow??™s price will reflect only tomorrow??™s news. However news in unpredictable and thus the resulting price changes are unpredictable and random, altering as new information becomes available. Essentially investors have access to all relevant information about a company and will therefore act upon the information in a rational manner.
There are number of influences that trigger price volatility often leading to the markets making egregious mistakes in valuing company shares. Markets are influenced by investor sentiment, fear, greed and speculation.
Behavioural finance attempts to explain the market implications of the psychological factors behind decisions and suggests that irrational investor behaviour may significantly affect share price movement. Individuals see a stock price rising/falling and are drawn/flee the market in a ???bandwagon effect??? (B Malkiel, 2003)
For instance the stock market crash in 1987, markets around the world fell significantly caused by short-run overreaction to events. Equally, Shiller (2000) describes the rise in US stock market during the late 1990s as the result of psychological contagion leading to irrational exuberance.
Political events may cause significant share price movement on world markets such as wars, terrorism, and unstable government. Notably the previous sharpest one day fall prior to 1987 crash was on March 1, 1974 after Labour indecisive election victory when share fell 7.1%.
During the bubble period investors responded to daring business opportunities by throwing lots of money at it and the market rose. Unfortunately, the growth in the tech industry proved to be illusionary and the markets immediately tumbled by way of correction.
Share prices and their individual volatility is also linked to investor confidence in the company??™s future prospects both in terms of dividend streams and capital growth and thus investor speculation plays a major part in share valuation as do marketability and liquidity of shares.
Other anomalies of market irrationality include the season of the month effect, day of the week effect such that share prices might tend to rise or fall at a particular time of the year, week or day.
In conclusion it is my opinion that markets are far more efficient at valuing stock prices as they do not allow big winners unless big bets are placed on the market.

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Business Scenario

Category : Articles

Having to relocate a profitable Urologist office to Ciudad Juarez, Chihuahua Mexico is going to be very challenging, and is going to take a lot of critical thinking. With all the extortions and brutal slayings totaling over 5,000 people killed in Mexico will be a challenging relocation. Strategic Planning is essential when relocating a business, in order for the transition to be smooth and successful.

Decisions in Paradise Business Scenario
When Dr. Hani first told me we were going to relocate our profitable urology clinic to Ciudad Juarez, Chihuahua Mexico, the first thing that came to my mind was the beautiful city of Ciudad Juarez I remember not to long ago, about 4 years ago to be exact. I started to day dream going back to beautiful places I had once visited in Ciudad Juarez. I remember visiting the National Museum of Anthropology which is considered one of the world??™s most inclusive ordinary history museums. I remember visiting the Plaza of Zocalo one of the largest plazas in the world, the Frida Kahlo Museum, the Dolores Olmedo Patino Museum, and I even went back as a child on my day dream, when my parents took us to visit the Chapultepec Park, a 1,600 acre bucolic park with a lot of fun activities. The relocating sounded very interesting in the beginning however, we had to come down to identifying the problem and do some critical thinking and research on Ciudad Juarez before relocating. Before we began searching on real estate, we wanted to know more about the city. We discovered that Juarez was formerly known as El Paso del Norte and the population is now 1.5 million people. There are four international ports of entry connecting Ciudad Juarez and El Paso, Texas, the Bridges included are the Bridge of Americas, Paso del Norte Bridge, Stanton Street Bridge, and Ysleta International Bridge That was very important for our business practice, because El Paso patient??™s would also be able to visit our new clinic in Ciudad Juarez if needed.
The Problem
The problem in Ciudad Juarez despite the beautiful city is the crime and drug cartel violence. In Ciudad Juarez alone there has been over 1,400 dead. The people in Juarez have had to change their daily living and routine chores due to the crime. Many residents stay home in the evening, and do not even hang out in their front yards due to being afraid of being kidnapped or hit by a stray bullet. Many business have closed due to all the extortions, and killing threats. The violence has caused a shortage in healthcare professionals creating over crowded hospitals and leaving many patients untreated in Ciudad Juarez. The situation of crime violence in Ciudad Juarez will certainly affect the business relocation.
Goals and Objectives
With this business relocation the objective is to provide quality healthcare to the needed residents of Ciudad Juarez. the organizations goal is to save as many lives possible with the medical knowledge given and technology provided. Many men in Ciudad Juarez have been diagnosed with prostate cancer and unfortunately have gone untreated due to financial status. In Juarez hospitals will not treat a patient without collecting payment first. This can be blamed on the poor leadership on the economy by the government.


Bowden, C.(2010). U.S.-Mexico war on drugs a failure. Retrieved May 13, 2010, from
Langdon, K.(2001). An Introduction to the Decision Making Process. Retrieved May 13, 2010,

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Financial Management

Category : Articles

Financial Management
-Individual assignment (Issues in Determination of Capital Structure for Maximizing the Firm??™s value)

1.0 Introduction 3
2.0 Capital Structure 4
2.1 Restraints of Capital Structure 4
2.2 Analysis of Restraints on the Comparative Study of Corporate Value 6
2.3 Evaluation of the Application on organisation??™s wealth 7
3.0 Agency Theory 9
4.0 Role of Financial management 11
4.1 Objective of financial management 11
4.2 Addressing problems of agency theory 11
Conclusion 13
References 14

1.0 Introduction
Economic development makes new requirements to enterprise financial management system improvement and development of proposed. How to set scientifically optimal objective of financial management, financial management theory for the study to determine the optimal capital structure, effectively guide the financial management practices has a certain practical significance. This paper from financial management to determine the optimal objective, analysis of financial enterprises and maximize the value of the relationship between capital structure and capital structure using the measurement of indicators, the liabilities of companies operating conditions were analyzed.

2.0 Capital Structure
Capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities, and it is something that every corporation would encounter. Moreover, capital structure is of great significance to economic efficiency of enterprises, and it also serves as a core issue in financing decision of enterprises. An appropriate capital structure contributes to lowering the enterprises??™ capital cost through selecting sources and proportion of capital. As financial leverage has its own functions, its benefit maximizes when debt ratio is acceptable. Consequently, proper control of debt ratio in capital sources, balance between risk and cost, reduction of financial risks together with the positive effect of financial leverage contribute more to value accumulation. In addition, an appropriate capital structure is conducive to better corporate image and borrowing capacity in a bid to meet the needs of business management and operation (Feng, B. 2005).

2.1 Restraints of Capital Structure
In business management and operation, capital structure can be influenced by many factors which are generally divided into two sections, namely macroscopic factors and microcosmic factors.
Macroscopic Factors (Hu, G.L. 2004)
Industries. As different industries and different corporations in the same industry usually adopt quite different strategies and policies on financial leverage, there are great and obvious differences of capital structure in various industries.
Interest Rate. Financial leverage can bring about more profits to corporations by debt financing, which is benefit on financial leverage. However, if improperly applied, it brings about financial risks too.

Income Tax Rate. Interest on debt is paid before tax while dividend is required to pay after tax, so from the perspective of cutting capital cost, debt financing, when compared with equity financing, contributes to tax-saving, which attracts corporations to choose debt financing under given conditions.
Inflation. In the case of inflation, corporation financial leverage is profitable when return on assets outweighs interest rate, because currency has time value, what corporations pay for is much cheaper one.
Microcosmic Factors
(, 2011)
Enterprise Scale. Generally speaking, large-scale enterprises have better business credit and anti-risk capability than small enterprises, so debt ratio of the former truly exceeds that of the latter.
Profit Level of Enterprise. Only when return on assets outweighs interest rate will enterprises invest by debt financing to achieve tax-saving profits and benefits on financial leverage, or it doesn??™t deserve investment. Thereby, profit level of enterprises directly impacts the decision of capital structure.
Decision Makers??™ Attitude on Risk Investment. In regard to the same project, decision makers who are fond of taking risks would increase debt financing to achieve more profits while those who dislike running risks would avoid it and then make safe and conservative decisions to reduce the proportion of debt financing.
Development Stage of Enterprise. In burgeoning stage, enterprises usually need more capital, which drives them to seek liability capital. At this time debt ratio undoubtedly is relatively high. When enterprises grow much stronger, they have accumulated much fund and do not need much debt financing, which results in the decline of debt ratio.

2.2 Analysis of Restraints on the Comparative Study of Corporate Value
Although comparative study of corporate value has its advantages, it has limited field of application due to the following factors:
Different corporations have different risks, which results in uncertain discount rate. Corporations in different industries have various operational risk and financial risk, so do corporations in the same industry. All these result in the difficulty of identifying capital cost when adopting the Capital Asset Pricing Model (CAPM) (Kurschner, M. 2008).
Madura, J. (2008) pointed that Corporations have to pay for various taxes instead of income tax alone. Taking all the effects of tax revenue into consideration, we may make mistakes when adopting the above-mentioned formula. Especially when the comprehensive effects on corporate value from other tax categories outweigh that if income tax, a converse outcome may emerge, which leads to unfavorable decision of capital structure.
As corporation??™s growth rate ceases to stop increasing, it is rather difficult to confirm capital structure by comparative study of corporate value in the case of ever-growing corporations. The requisite of comparative study of corporate value lies in assuming the corporation cash flow is perpetual annuity. However, it is rather difficult to achieve in reality, because the grow rate of a corporation can be positive or negative. Such fluctuations result to the uncertainty of capital structure which requires calculating dynamically.
2.3 Evaluation of the Application on organisation??™s wealth
Optimum capital structure refers to the capital structure which maximizes the corporate value in a given period. It can achieve optimal balance among financial leverage, financial risk, capital cost and corporate value (Herbst, F.A. 2002). Theoretically, such capital structure might exist and could be served as the target capital structure of a corporation, but in reality many insurmountable difficulties have blocked our way, and even the relatively full-fledged comparative study of corporate value fails to solve this problem.
First of all, different countries have different assessment systems. Assuming that risk level is fixed, there should be an optimal capital structure. Assuming that transaction cost is zero, then the corporate financial structure is unrelated to corporate value. Assuming the corporate risk is low, and then liabilities should increase. For example, in Chinese state-owned enterprises, when vicious price competition occurs, the state-owned enterprise which raises a loan has competitive edge. That??™s to say, corporations can take more risks and produce more items with higher debt level, because corporate risks under such circumstances actually lower. Corporations are willing to borrow more money, which is the reason of why Chinese state-owned enterprises are inclined to raise debt financing and debt ratio keeps rising. However in America most corporations have relatively low debt and equity ratio.
Secondly, the same corporation has different optimal debt ratio in different period and operating performance. To some state-owned enterprises which have sound operating performance or in the period of sound performance, financial leverage has positive effect on economic growth, and general meeting of shareholders or the board of directors would stimulate business manager to raise more debts through incentive mechanism. However, to some state-owned enterprises which have unfavorable operating performance or in the period of unfavorable performance, financial leverage has negative effect on economic growth, and corporations should cut down debts. So the debt ratio of state-owned enterprises is a dynamical number. In a given period, each corporation should have an optimal debt ratio (capital structure). The optimization of capital structure should have a dynamic target, and its rationality is evaluated by whether marginal return on total assets surpasses marginal capital cost (, 2011).
Thirdly, given the effects of tax revenue and financial risks, we can draw a restrictive conclusion in regard to optimal capital structure. Benefit of tax revenue brought about by leverage is only important to those corporations having to pay for tax. Corporations which have actual aggregated loss can benefit from tax evasion of interest and depreciation, etc, but they benefit less from leverage. Similarly, different corporations have different tax rates, and the higher tax rate is, the greater debt risk is. As to financial risk, corporations having higher financial risk borrow less money than those having lower financial risk (Chen, H.F. 2005).
In short, when identifying the corporate capital structure with the comparative study of corporate value, we should avoid simple calculation. What we should fully concern is the realistic conditions in realizing the capital structure and optimizing capital structure to maximize corporate value.

3.0 Agency Theory
Agency theory suggests that the firm can be viewed as a nexus of contracts between resource holders. An agency relationship means the principal individuals hire others as agents to perform service or functions (Charles W. L, 2007).
In a seminal paper Jensen and Meckling (1976) suggested that we should think of the firm as consisting of groups of security holders with differing interests rather than as a single agent as traditional theory had done. They emphasized two conflicts. The first is between shareholders or entrepreneurs and bondholders. The second is between shareholders and managers. These conflicts lead to two agency problems.
To illustrate the first agency problem consider the shareholder-bondholder conflict. Given that shareholders obtain any payoff in excess of the debt repayment they (or managers acting in their interest) have an incentive to take risks so that the average payment they receive is increased. They showed that firms acting in the interest of shareholders may be willing to accept negative net present value projects if the shareholders average payment is increased at the expense of the bondholders. This is the risk shifting (also sometimes called asset substitution) problem. The problem is not restricted to the shareholder-bondholder conflict. It can also arise in the context of the shareholder-manager problem.
The second agency problem that Jensen and Meckling (1976) stressed was the effort problem. This can be illustrated in the context of the between shareholder-manager problem but also arises in the bondholder-entrepreneur problem. If managers have a disutility of effort and are paid a wage then they will have an incentive to shirk rather than act in shareholders interests. It is therefore important that managers incentives are aligned with those of shareholders.
Myers (1977) pointed to another crucial agency problem, debt overhang. If a firm has a large amount of debt outstanding then the proceeds to any new safe project that it undertakes will flow to the existing bondholders. As a result if the firm acts in the interests of shareholders it will be unwilling to accept even safe projects even if they have a positive net present value.
The papers by Jensen and Meckling (1976) and Myers (1977) had a huge impact. At one point the Jensen and Meckling paper was the most cited paper in Economics. A large literature focused on the conflict between shareholders and managers. Grossman and Hart (1982) pointed to the incentive effects of debt. If a firm takes on a lot of debt the managers will be forced to work hard. Jensen (1986) also emphasized the incentive aspects of debt in his famous “free cash flow” theory. If managers have access to large amounts of funds, ie free cash flow, they may use it to pursue their own interests rather than the shareholders. One way the shareholders can prevent this is for the firm to take on a lot of debt. Easterbrook (1984) pointed to the incentive effects of dividends. If managers pay out a large amount in dividends they will be unable to waste the funds pursuing their own interests. The Jensen and Meckling article also lead to a consideration of how the managers incentives could be aligned with those of the shareholders through executive compensation. There is a large literature on executive compensation which is summarized in Murphy (1998).
Finally, there is also a large literature justifying debt as an optimal con-tract which uses an agency approach.

4.0 Role of Financial management
4.1 Objective of financial management
Brigham, F.E. (2008) stated that financial management as part of the management of an important component of its meaning lies in the realization of business objectives. Enterprises manage their own business and independent commodity producers and operators, not only to the extent possible, to maximize profits, but also to ensure the steady development, and enhance the mobility of enterprises and avoid the risk. Therefore, the financial management function is to focus on profit maximization and risk minimization targets of this operation.
4.2 Addressing problems of agency theory
Financial management should through capital structure optimized to reduce agency costs, or reduce agency costs through optimization of capital structure, the two are interacting in order to achieve the maximization of corporate value.
Agency conflicts must be resolved in some way. The stakeholders can sign an agreement to resolve these conflicts. For example, they can through restrictive agreements to avoid potential conflicts. When an agreement can not be resolved through a conflict, the investors will be in their own way to solve the problem. They wish to pay by lowering their prices to avoid future debt the risk of loss of wealth. When the company issued the securities, the securities agency costs are all special agreements (such as bonds of restrictive agreements, extremely high cost of such an agreement, because they limit the companys choice.) Costs of, and together with other potential conflicts due to price reduced.
Capital structure will also affect the companys corporate agency costs related to labor agreements. The bankruptcy of a companys employees in order to find a new job are more likely to find costs and these costs each company is different. The expected cost of employee job depends on whether the companys products and services specialization. Employees working on the implementation of mass-specific work with respect to employees engaged in the former expected to find lower cost. Human capital reflects this difference. Therefore, when other conditions being equal, and human-related costs for the agency to provide specialized products and services relative to the companies higher. Due to higher leverage ratio will result in higher agency costs, so this probably means the special products and services will affect the degree of capital structure choice.
Debt financing may also reduce the companys agency costs, such as the cost of shareholders and creditors to monitor the managers cost of shareholder oversight. As long as the company issued new debt, the creditor will carefully analyze the potential situation of the company to determine the fair price of the debt. So every time a new issue of debt, existing creditors and shareholders are free access to a companys external audit. This reduces the external audit due diligence to ensure that an agent spent in supervision costs.

Another approach is the use of sinking fund through the terms. Through the sinking fund, the company can meet each other than interest payments than the need. If difficult to establish a sinking fund, it may be an earlier sign that the company may be in a financial predicament. If you can not create a sinking fund is required means that the company may be unable to pay due. Obviously, this monitoring function is benefit for creditors, but also conducive to the shareholders of the company manager for further supervision.

Solve the agency problems so as to optimize the capital structure, inevitably involves the supervision of financial supervision and accounting, and other monitoring tools. In fact, many factors in the financial environment can be used as monitoring tools, in the normal operating procedures, people, and seek information publicly available, they also transmit information through its own to act, the Government will be disclosed when the implementation of laws and regulations, information, and even the companys reputation and structure will also impart information. A good performance of capital structure management will maximise the wealth of organisations.

Feng, B. (2005), Optimization of Capital Structure and Governance, China Legal Publishing House, p.30

Hu, G.L. (2004), Capital Decision Making, Corporate Financial Strategy and Financial Control, Tsinghua University Press

Kurschner, M. (2008), Limitations of the Capital Asset Pricing Model (CAPM): Criticism and New Developments, GRIN Verlag

Madura, J. (2008), International Financial Management, 9th edition, Cengage Learning

Herbst, F.A. (2002), Capital asset investment: strategy, tactics & tools, 3rd edition, John Wiley and Sons, pp.36-37

Chen, H.F. (2005), Corporate Finance Studies, Tsinghua University Press, pp.172-181

Charles W. L, (2007), Strategic management: an integrated approach, 8th edition, Cengage Learning, pp.372-375

Brigham, F.E. (2008), Fundamentals of financial management, 6th edition, Cengage Learning

Jensen, Michael and William Meckling (1976), ???Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure,??? Journal of Financial Economics 3, 305-60.

Myers, S. (1977). ???Determinants of Corporate Borrowing,??? Journal of Financial Economics 5, pp.147-75

Easterbrook, F. (1984). ???Two Agency-Cost Explanations of Dividends,??? American Economic Review 74, pp.650-659

Murphy, Kevin J. (1999). ???Executive Compensation,??? in O. Ashenfelter and D. Card (eds.), Handbook of Labor Economics, Volume 3B, New York and Oxford: Elsevier Science, North-Holland, pp.2485-2563., (Accessed 5th 2011), (Accessed 7th 2011)

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Business Sample

Category : Articles

Tyeshia Bruce 6/12/11

Owning the Perfect Business

Owning a daycare center is a business I would like to have because I love children. Escorting my children to daycare every morning gave me an idea of owning one myself. My daycare center would help out parents who really cannot afford the child care for their children. The daycare center I plan to have would serve the quality of many children of all races. After, I start my first daycare center; I??™m hoping to expand, depending on how well business goes for the first facility. I would love to have the best daycare in town and also the best business partners, so this can make things better for my future and the future of others.
A well organize daycare center comes with more than just having one. It comes with great researchers and creative leaders. The team I would hire would be a team who help to find a great and safe place for our children. Great workers are everything I want for my facility. Researchers are great to have, because they can help with finding a great place. Creative leaders can also manage how well the facility will look and the difference it would make to grab the parent??™s attention. We want to grab the parent??™s attention, so we will make it look great to the best of our stability.
There is no weakness surrounding the program that is fit for people who will always have to be on their toes twenty-four-seven. Strong people make a facility great and safe. Without a strong staff to work with it makes things a little off target. Everything has to start from the top, if you have a great team working on top, and then there will be great people hire. A worker who knows their job is the ones who will get the title working for me. Of course, everyone will have to be interviewed for any position that they are giving. After, they will be trained into the best workers of the business. Training can be a lot but we want what the best for our parents and their children. After, everything is out into place we want to provide great and excellent products for the care of our children.
The opportunity of a great daycare center is having the best of everything. In the business sample of daycare center, in order for the daycare to expand they came up with different things to do. They put a facility where it was the only facility, which was close for many families. They also hired the best people to make things great for them, far as, money, children, and how well it look inside. When I open my facility, I will want the same. I will want it to stand out and look different. I will also like a facility where there none, but a lot of children because it would help with profit and more. To expand would be great for business owners because it gives an opportunity to grow and also for other workers to expand with us also.

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Financial Management

Category : Articles

According to research Cost-volume-profit (CVP) analysis is a technique that examines changes in profits in response to changes in sales volumes, costs, and prices. Accountants often perform CVP analysis to plan future levels of operating activity and provide information about:
_ Which products or services to emphasize
_ The volume of sales needed to achieve a targeted level of profit
_ The amount of revenue required to avoid losses
_ Whether to increase fixed costs
_ How much to budget for discretionary expenditures
_ Whether fixed costs expose the organization to an unacceptable level of risk
Cost-Volume-Profit Analysis
There are five components of CVP analysis ; (a) volume or level of activity, (b) unit selling prices, (c) variable cost per unit, (d) total fixed costs, and (e) sales mix.
The COST??“VOLUME??“PROFIT (C??“V??“P) analysis is the analysis of the cost evolution
models, which points out the relations between cost, production volume and profit. The C??“V??“P analysis is a useful forecasting as well as managerial control tool. The method includes a set of problem solving techniques and procedures, based on understanding the
characteristics of company costs evolution models. The techniques express the relations
between income, sales structure, costs, production volume and profits and include breakeven point analysis and profit forecasting procedures. These relations provide a general economic activity model, which may be used by managers to make short-term forecasts, to assess company performance and to analyze decision-making alternatives.
Dorina BUDUGAN*, Iuliana GEORGESCU**
DocShare Accounting For Management
Zero based budgeting (ZBB) is an alternative approach that is sometimes used particularly in government and not for profit sectors of the economy. Under zero based budgeting managers are required to justify all budgeted expenditures, not just changes in the budget from the previous year. The base line is zero rather than last years budget.
Zero based budgeting approach requires considerable documentation. In addition to all of the schedules in the usual master budget, the manager must prepare a series of decision packages in which all of the activities of the department are ranked according to their relative importance and the cost of each activity is identified. Higher level managers can then review the decision packages and cut back in those areas that appear to be less critical or whose costs do not appear to be justified.
Zero based budgeting is a good idea. The only issue is the frequency with which a ZBB review is carried out. Under zero based budgeting (ZBB) ,the review is performed every year. Critics of such type of budgeting charge that properly executed zero based budgeting is too time consuming and too costly to justify on an annual basis. In addition, it is argued that annual reviews soon become mathematical and that the whole purpose of zero based budgeting is then lost. Whether or not a company should use annual reviews is a matter of judgment. In some situations, annual zero based reviews may be justified; in other situations they may not because of the time and cost involved. However, most managers would at least agree that on occasion zero based reviews can be very helpful.
Advantages | benefits of zero based budgeting process:
1. Efficient allocation of resources, as it is based on needs and benefits.
2. Drives managers to find cost effective ways to improve operations.
3. Detects inflated budgets.
4. Municipal planning departments are exempt from this budgeting practice.
5. Useful for service departments where the output is difficult to identify.
6. Increases staff motivation by providing greater initiative and responsibility in decision-making.
7. Increases communication and coordination within the organization.
8. Identifies and eliminates wasteful and obsolete operations.
9. Identifies opportunities for outsourcing.
10. Forces cost centers to identify their mission and their relationship to overall goals.
Disadvantages | Limitations of zero based budgeting method.
1. Difficult to define decision units and decision packages, as it is time-consuming and exhaustive.
2. Forced to justify every detail related to expenditure. The research and development (R&D) department is threatened whereas the production department benefits.
3. Necessary to train managers. Zero based budgeting (ZBB) must be clearly understood by managers at various levels to be successfully implemented. Difficult to administer and communicate the budgeting because more managers are involved in the process.
4. In a large organization, the volume of forms may be so large that no one person could read it all. Compressing the information down to a usable size might remove critically important details.
5. Honesty of the managers must be reliable and uniform. Any manager that exaggerates skews the results.
Budgeting in an organization, also known as the annual planning process, is designed to provide managers with a blueprint for operating the company. The budget shows what the company intends to spend in order to generate revenues, what the projected revenues are and the profit the company will earn if it achieves its revenue goals. Even within companies where the budgeting system has been in place for a number of years, the process is not completely efficient.
The traditional approach to budgeting is a blend of top-down and bottom-up budgeting methods. Top-down means top management sets goals for the year and communicates them down the chain of command. In bottom-up budgeting, department managers prepare budgets for the business segment they are responsible for and send the budget up to top management for consolidation into a company-wide budget or plan.

Read more: The Disadvantages of the Traditional Approach to Budgeting |
The conventional budgeting process does have one major disadvantage. Managers tend to prepare new budget requests by adding an incremental amount to their previous years budget requests, rather than re-evaluating the need for things already included.
Zero-base budgeting (ZBB), in contrast, enables the organization to look at its activities and priorities a fresh. Zero-base budgeting assumes that the previous years budget is not a valid base from which to work. It forces department managers to thoroughly examine their operations and justify their departments activities based on their direct to the achievement of organizational goals. Zero-base Budgets

Read more: The Disadvantages of the Traditional Approach to Budgeting |

Payment in capitation vs fee for service
[edit] Capitation payments
Under a capitation system, healthcare service providers (physicians) are paid a set amount for each enrolled person assigned to that physician or group of physicians, whether or not that person seeks care, per period of time.
The amount of remuneration is based on the average expected health care utilization of that patient (more remuneration for patients with medical history). Other factors considered include age, race, sex, type of employment, and geographical location.
The capitation system provides certainty to both providers (doctors, hospitals) and payers (insurance companies) as to the financial aspects of care delivery. The providers assume the risk of more patients than expected falling sick and needing care.
[edit] Fee for service payments
As the name implies, fee for service payments are made based on invoices for services delivered. In this system, neither the healthcare provider nor the payer have any certainty as to medical costs. The risk of cost overruns caused by more people than expected needing healthcare is assumed by the payer (insurance company) and not the providers.
[edit] Fee For Service in the healthcare debate
Some critics believe that the fee for service system provides healthcare providers (doctors, hospitals) incentives to do unnecessary medial procedures. They argue that since providers get paid more for delivering more services, rather than for outcomes, they tend to run tests and procedures that may not otherwise be necessary. This drives up the cost of healthcare.

Read more: Capitation vs Fee For Service – Difference and Comparison | Diffen