Present value Interest Factor PVIF

A factor that can be used to simplify the calculation for finding the present value of a series of values. PVIFs can be presented in the form of a table with PVIF values seperated by respective period and interest rate combinations.

Pay back Period

 What is the payback period? What are the advantages and limitations of using this method?

PP is the simplest method of looking at one or more investment projects or ideas. This method focuses on recovering the cost of investments.  PP represents the amount of time that it take

For a capital budgeting project to recover its initial cost.

            (cost of proj /Investment )

    PP =     -------------------------------

          Annual cash inflows

Eg:  proj cost $200,000, and returns of proj 40,000 annually.

PP here is   $200,000 /40,000 = 5 years.

 

Advantage: Easy to calculate

 

Problems:

1. It ignores benefits occur after Payback period, and so does not measure the total incomes
2. PP ignores the Time value of Money.

Agency Cost

[A] : 

What Does Agency Costs Mean?

A type of internal cost that arises from, or must be paid to, an agent acting on behalf of a principal. Agency costs arise because of core problems such as conflicts of interest between shareholders and management. Shareholders wish for management to run the company in a way that increases shareholder value. But management may wish to grow the company in ways that maximize their personal power and wealth that may not be in the best interests of shareholders.

Src: http://www.investopedia.com/terms/a/agencycosts.asp

[B]

An agency cost is an economic concept that relates to the cost incurred by an entity (such as organizations) associated with problems such as divergent management-shareholder objectives and information asymmetry. The costs consist of two main sources:

1. The costs inherently associated with using an agent (e.g., the risk that agents will use organizational resource for their own benefit) and
2. The costs of techniques used to mitigate the problems associated with using an agent (e.g., the costs of producing financial statements or the use of stock options to align executive interests to shareholder interests).

Though effects of agency cost are present in any agency relationship, the term is most used in business contexts.

Src://http://www.absoluteastronomy.com/topics/Agency_cost

Difference between Stock price and Profit Maximization

[A]

Stock price maximizing = percentage increase in the price of a stock.
Profit maximizing = percentage increase in the amount invested. Which would be stock price increase minus the cost of investing. 
Profit maximizing should be the goal. So you would try to reduce the cost of investing: trading costs and fees.

[B]

the difference between the stock price and profit in terms of timing difference. Stock price incorporates every facet of what investor expect to see from his investment agent i.e. future investment opportunty, any incurred business constraints, government regulations to effect company's value, etc while profit focuses on what is realized explicitly from invested money which is shown in income statement. Logically, this two stuff is different in light of pre-post rationale.

Thus, stock price movement is strongly relied on market expectation on that stock. Any relevant incident either to boost up or dampen the value of company will be well-calulated and reflexed into the price. To maximize stock price, that company need to create a viable business to ensure the stability of future cash flows, any revenue enhancements and cost reductions will create value given that action will not negatively affect future cash flows. 
The cost reduction that won't or potentially undermine value is the reduction of project investments, innovations and risk management because those action will increase risk and lessen competitiveness.
To maximize profit, the company can do it by maximizing revenue and minimized both operational cost and financial cost. Some measures to spur sales are extending the flavorable term of payment to customers (this will increase the accounts receivable), sales promotions, etc. while operational and financial cost reduction can be achieved by sophisicate capital budgeting and opimal cost of capital.

Profit Maximization Problem :

Because it does not consider the riskiness of returns and it ignores the timing of returns. Because it does not consider the riskiness of returns and it ignores the timing of returns. 

Src: http://www.askmehelpdesk.com/investing/difference-between-stock-price-maximization-profit-maximization-37223.html

Agency Problem

Agency problem is the problem or conflict between the management of the company the the owner or principal of the company. The problem or conflict comes from the different interest of management and owner. This problem will affect the performance of the company and also the financial decision of the company such as when the company want to issue the new stock or the new bond.

Besides, the companies must run the business in the best interest of all stakeholders. One of the stakeholders is the shareholder. In order to achive that goal today many companies implement the corporate governance system. The corporate governance system is used to make sure that the management of the company can run the company in the best interest of all stakeholders. Because shareholders are part of stakeholder, therefore the corporate governance system can also reduce the agency problem

1. Principal-Agent Problem.

where one party, called an agent, acts on behalf of another party, called the principal. The agent usually has more information about his or her actions or intentions than the principal does, because the principal usually cannot perfectly monitor the agent. The agent may have an incentive to act inappropriately (from the viewpoint of the principal) if the interests of the agent and the principal are not aligned.

2. Moral hazard

Moral hazard is related to information asymmetry, a situation in which one party in a transaction has more information than another. The party that is insulated from risk generally has more information about its actions and intentions than the party paying for the negative consequences of the risk. More broadly, moral hazard occurs when the party with more information about its actions or intentions has a tendency or incentive to behave inappropriately from the perspective of the party with less information.

3. Adverse Selecction

The term adverse selection was originally used in insurance. It describes a situation where an individual's demand for insurance (either the propensity to buy insurance, or the quantity purchased, or both) is positively correlated with the individual's risk of loss (e.g. higher risks buy more insurance), and the insurer is unable to allow for this correlation in the price of insurance. This may be because of private information known only to the individual (information asymmetry), or because of regulations or social norms which prevent the insurer from using certain categories of known information to set prices (e.g. the insurer may be prohibited from using information such as gender or ethnic origin or genetic test results).

Src:http://en.wikipedia.org

Goals of Financial Manager

  Finance integrates the concepts from economics,Accounting and many other areas.

* It is the study of relationship of Rish to Return is a central focus.

* The primary goal of finance  Manager is to maximize the value of

    wealth of shareholders.

* Financial Manager try to maximize the wealth by daily activities like

   Credit and Inventory management and Long-term by raising Funds.

* Finance Manager must consider both domestic and International business conditions before taking any decisions.

Goals:

1 . Survival of the organization.

2. Avoiding Bankruptcy

3. Maximize market share.

4.  Maximize cost

5.  Maximize Profit.

Concerns:

    Maximizing the profit may not be in stockholder's interest.

Maximize the wealth of the owners, the stock holders, i.e., to maximize today’s stock price.

HR Management as Strategic Business Contributor

One of the most important shifts in the emphasis of HR management in the past
few years has been the recognition of HR as a strategic business contributor. Even
organizations that are not-for-profit, such as governmental or social service entities,
must manage their human resources as being valuable and in a “businessoriented”
manner. Based upon the research and writings of a number of scholars,
including David Ulrich of the University of Michigan, the importance of HR
being a strategic business partner has been stressed.16 This emphasis has several
facets to it.
SOURCE: Reprinted with permission from Bulletin to Management (BNA Policy and Practice Series) Vol. 49

Enhancing Organizational Performance
Organizational performance can be seen in how effectively the products or services
of the organization are delivered to the customers. The human resources in
organizations are the ones who design, produce, and deliver those services.
Therefore, one goal of HR management is to establish activities that contribute to
superior organizational performance.17 Only by doing so can HR professionals
justify the claim that they contribute to the strategic success of the organization.

INVOLVEMENT IN STRATEGIC PLANNING

Integral to being a strategic partner is for

HR to have “a seat at the table” when organizational strategic planning is being

done. Strategically, then, human resources must be viewed in the same context as

the financial, technological, and other resources that are managed in organizations.

For instance, the strategic planning team at one consumer retailer was considering

setting strategic goals to expand the number of stores by 25% and move

geographically into new areas. The HR executive provided information on workforce

availability and typical pay rates for each of the areas and recommended

that the plans be scaled back due to tight labor markets for hiring employees at

pay rates consistent with the financial plans being considered. This illustration of

HR professionals participating in strategic planning is being seen more frequently

in organizations today than in the past.

DECISION MAKING ON MERGERS, ACQUISITIONS, AND DOWNSIZING

In many industries

today, organizations are merging with or acquiring other firms. One

prime illustration is the banking and financial services industry, in which combinations

of banks have resulted in changes at Bank of America, Wells Fargo, Nations

Bank, First Union, and others large and small. The merger of Chrysler and

Daimler-Benz has had significant implications for the automobile industry. Many

other examples could be cited as well.

In all of these mergers and acquisitions there are numerous HR issues associated

with combined organizational cultures and operations. If they are viewed as

strategic contributors, HR professionals will participate in the discussions prior to

top management making final decisions. For example, in a firm with 1,000

employees, the Vice-President of Human Resources spends one week in any firm

that is proposed for merger or acquisition to determine if the “corporate cultures”

of the two entities are compatible. Two potential acquisitions that were viable financially

were not made because he determined that the organizations would

not mesh well and that some talented employees in both organizations probably

would quit. But according to one survey of 88 companies, this level of involvement

by HR professionals is unusual. That study found that less than one-third

of those involved in mergers surveyed have adequately considered HR issues.

REDESIGNING ORGANIZATIONS AND WORK PROCESSES 

It is well established in the

strategic planning process that organization structure follows strategic planning.

The implication of this concept is that changes in the organization structure and

how work is divided into jobs should become the vehicles for the organization to

drive toward its strategic plans and goals.

A complete understanding of strategic sources of competitive advantages for

human resources must include analyses of the internal strengths and weaknesses

of the human resources in an organization. Those in HR management must be

the ones working with operating executives and managers to revise the organization

and its components. Ulrich likens this need to that of being an organizational

architect. He suggests that HR managers should function much as

architects do when redesigning existing buildings.19 In this role HR professionals

prepare new ways to align the organization and its work with the strategic thrust

of each business unit.

ENSURING FINANCIAL ACCOUNTABILITY FOR HR RESULTS

 A final part of the HR management

link to organizational performance is to demonstrate on a continuing basis

that HR activities and efforts contribute to the financial results of the organization.20

Traditionally, HR was seen as activity-oriented, focusing on what was done, rather

than what financial costs and benefits resulted from HR efforts. For instance, in one

firm the HR director reported every month to senior management how many people

were hired and how many had left the organization. However, the senior managers

were becoming increasingly concerned about how long employment

openings were vacant and the high turnover rate in customer service jobs. A new HR

director was hired who conducted a study that documented the cost of losing customer

service representatives. The HR director then requested funds to raise wages

for customer service representatives and also implemented an incentive program for

those employees. Also, a new customer service training program was developed. After

one year the HR director was able to document net benefits of $150,000 in reduction

of turnover and lower hiring costs for customer service representatives.

In the past HR professionals justified their existence by counting activities and

tasks performed. To be strategic contributors, HR professionals must measure

what their activities produce as organizational results, specifically as a return on

the investments in human resources.21 HR management that focues on highperformance

work practices has been linked to better financial performance of

the organization.

Role of HRM

Administrative Role of HR Management
The administrative role of HR management is heavily oriented to processing and
record keeping. Maintaining employee files and HR-related databases, processing
employee benefits claims, answering questions about tuition and/or sick leave
policies, and compiling and submitting required state and federal government reports
are all examples of the administrative nature of HR management. These activities
must be performed efficiently and promptly.
However, this role resulted in HR management in some organizations getting
the reputation of paper shufflers who primarily tell managers and
employees what cannot be done. If limited to the administrative role, HR staff
are seen primarily as clerical and lower-level administrative contributors to the
organization.

Operational Role of HR Management
Operational activities are tactical in nature. Compliance with equal employment
opportunity and other laws must be ensured, employment applications must be
processed, current openings must be filled through interviews, supervisors must
be trained, safety problems must be resolved, and wages and salaries must be administered.
In short, a wide variety of the efforts performed typically are associated
with coordinating the management of HR activities with the actions of
managers and supervisors throughout the organization. This operational emphasis
still exists in some organizations, partly because of individual limitations of
HR staff members and partly because of top management’s resistance to an expanded
HR role.
Typically, the operational role requires HR professionals to identify and implement
operational programs and policies in the organization. They are the major implementors
of the HR portion of organizational strategic plans developed by top
management, rather than being deeply involved in developing those strategic plans.


Strategic Role of HR Management
Organizational human resources have grown as a strategic emphasis because effective
use of people in the organization can provide a competitive advantage, both
domestically and abroad. The strategic role of HR management emphasizes that
the people in an organization are valuable resources representing significant
organizational investments. For HR to play a strategic role it must focus on the
longer-term implications of HR issues.15 How changing workforce demographics
and workforce shortages will affect the organization, and what means will be
used to address the shortages over time, are illustrations of the strategic role. The
importance of this role has been the subject of extensive discussion recently in
the field, and those discussions have emphasized the need for HR management
to become a greater strategic contributor to the success of organizations.

Difference between Personnel and Human Resource Management

	Personnel	Human Resource
1.	Traditional, Routine, Maintenance-oriented, Administrative function	Continuous, On-going development function aimed at improving human processes
2.	Independent function with independent Sub-functions	HRD follows the systems thinking approach. It is not considered in isolation from the larger organization and must take into account the linkages and interfaces
3.	Reactive, Responding to demands as and when they arise.	HRD isProactive, Anticipating, Planning and  Advancing continuously
4.	PM is the exclusive responsibility of the personnel department	HRD is a concern for all managers in the organization and aims at developing the capabilities of all line managers to carry out the personnel functions.
5.	The scope of PM is relatively narrow with a focus on administering people	The scope of HRD views the organization as a whole and lays emphasis on building a dynamic culture.
6.	Important motivators in PM are compensation, rewards, job simplification and so on.	HRD considers work groups, challenges and creativity on the job as motivators.
7.	In PM improved satisfaction is considered to be the cause for improved performance	HRD it is the other way round (performance is the cause and satisfaction is the result).

source : P. C. Tripathi (2002), Human Resources Development, Sultan Chand & Sons

Humar Resource Management

Definition:

[Wikipedia]

Human resource management (HRM) is the strategic and coherent approach to the management of an organisation's most valued assets - the people working there who individually and collectively contribute to the achievement of the objectives of the business.[1] The terms "human resource management" and "human resources" (HR) have largely replaced the term "personnel management" as a description of the processes involved in managing people in organizations.[1] In simple sense, HRM means employing people, developing their resources, utilizing, maintaining and compensating their services in tune with the job and organizational requirement.

-----

2
Human Resource Management (HRM) is the function within an organization that focuses on recruitment of, management of, and providing direction for the people who work in the organization. Human Resource Management can also be performed by line managers.

Human Resource Management is the organizational function that deals with issues related to people such as compensation, hiring, performance management, organization development, safety, wellness, benefits, employee motivation, communication, administration, and training.

3.
A model of personnel management that focuses on the individual rather than taking a collective approach. Responsibility for human resource management is often devolved to line management. It is characterized by an emphasis on strategic integration, employee commitment, workforce flexibility, and quality of goods and services.

First : HRM

1.Define HRM
2. What are the differences between Human Resource Management and Personnel Management
3.Trace the development of HRM from PM
4.What are the basic tenants of HRM
5.What factors have contributed to HRM strategic role

Agency Relationship

The relationship between management and shareholders is sometimes referred to as an Agency Relationship, in which managers act as agents for the shareholders, using delegation powers to run the affairs of the company in the best interest of the shareholders.

Agency problem:
a potential conflict of interest between the agent (manager) and the outsider shareholders. (i.e. those not involved in running the business) and the creditors. For example, if managers hold none or very little equity shares of the company they work for, what is to stop them from working inefficiently, not bothering to look for profitable new investments opportunities, or giving themselves high salary or perks?

Agency theory:
proposes that, although the individual members of the business team act in their own self interest, the well being of each individual depends on the well being of other team members and on the performance of the team in competition with other teams.
One power that shareholders possess is the right to remove the directors from office but shareholders have to take initiative to do this, and in many companies, the shareholders lack energy and organisation to take such a step. Even so, directors will want the company’s report and accounts, and the proposed final dividend, to meet with the shareholders’ approval at annual general meeting.
Another reason why managers might do their best to improve the financial performance of their company is that managers’ pay is often related to the size or profitability of the company. Managers in very big companies, or in very profitable companies, will normally expect to earn higher salaries than managers in smaller or less successful companies.
Another source of conflict between managers and shareholders is that they have different attitude towards risk. A shareholder can spread his risk by investing his money in a number of companies; one company may go into liquidation but the shareholders’ financial security is not threatened. A manager’s financial security however, usually depends on what happens to the one company that employs him. The manager could therefore be less inclined than the shareholder to invest company’s funds in a risky investment.
A further situation in which conflict can arise is when a company is subject to takeover bid. The shareholders of the acquired firm very often receive above normal gains for the share price while managers loose their job, if lucky they may be picked by the new shareholders. It can therefore be argued that it is therefore not always the shareholders interest for the sought-after companies put up such a defence to drive the bidder away.
Agency theory suggests that audited accounts of a limited company are an important source of post- decision information minimising investors’ agency costs, in contrast to the alternative approaches which see financial reports as primarily a source of ‘pre-decision’ information for the equity investors.

Functions of Financial Management

Financial functions can be divided into three broad categories:
(1) Investment decision
(2) Financing decision and
(3) Dividend decision.

In other words, the firm decides how much to invest in short - term assets and how to raised the required funds. In making these decisions the financial manager should aim at increasing the value of the shareholder stake in the firm.

The financial manager rises from capital markets. He or she should therefore know how the capital market functions to allocate capital to the competing firms and how security prices are determined in the capital markets. Most companies have only one senior financial officer. But a large company may have both a treasurer and a controller.

The treasurer’s function is to raise and /manage company funds while the controller oversees whether funds are correctly applied. A number of companies in India either have a finance director or a vice president of finance as the chief financial officer.

src :http://www.managementparadise.com/forums/archive/index.php/t-20600.html

Goals of Corporate Finance

Finance management is a process of planning decisions in order to
maximize the owner's wealth. Financial managers have a major role in cash mangement, in acquisition,raising & allocating financial capital, trade off betweek risk and return.

Goals of Corporate Finance
1. Stockholder wealth maximization.
2. Profit Maximization.
3. Managerial reward maximization.
4. Behavioral goals and
5. Social Responsibilities.

Profit Maximization:
* single Period (short period less than a year).
* Organization can maximize short-term profits at the expense of its long term profitability.

Stockholder wealth maximization
* Wealth for long term
* Risk or uncertainty
* Timing of Returns
* Stockholder's Return.

Finance management

Goals of Corporate Finance

1. Stockholder wealth maximization.
2. Profit Maximization.
3. Managerial reward maximization.
4. Behavioral goals
5. Social Responsibilities.

Profit maximization
* basically single-period or short term (within 1 year)

Stockholder maximization
* Long term
* risk,
* timing of return (early is better)
* stockholder's return

Finance Concepts

FINANCE CONCEPTS FOR MANAGERS

Finance is the universal language of business, the language of goals, objectives, and results. Financial concepts are important for cash management, profit planning, capital investment, contingencies and risk planning, and measuring management performance. This program enhances the participants " financial savvy ", and helps to master the " how to " of financial communication. Today's managers need to have " finance savvy" to get ahead and stay ahead. This program will include the language of finance, presentation of financial data in financial statements and performance reports, and understanding the relevance of accounting rules and procedures.