Monthly Archives: March 2017

Merits and Demerits of Equity Finance

Equity finance means the owner, own funds and finance. Usually small scale business such as partnerships and sole proprietorships are operated by their owner trough their own finance. Joint stock companies operate on the basis of equity shares, but their management is different from share holders and investors.

Merits of Equity Finance:

Following are the merits of equity finance:

(i) Permanent in Nature: Equity finance is permanent in nature. There is no need to repay it unless liquidation occur. Shares once sold remain in the market. If any share holder wants to sell those shares he can do so in the stock exchange where company is listed. However, this will not pose any liquidity problem for the company.

(ii) Solvency: Equity finance increases the solvency of the business. It also helps in increasing the financial standing. In times of need the share capital can be increased by inviting offers from the general public to subscribe for new shares. This will enable the company to successfully face the financial crisis.

(iii) Credit Worthiness: High equity finance increases credit worthiness. A business in which equity finance has high proportion can easily take loan from banks. In contrast to those companies which are under serious debt burden, no longer remain attractive for investors. Higher proportion of equity finance means that less money will be needed for payment of interest on loans and financial expenses, so much of the profit will be distributed among share holders.

(iv) No Interest: No interest is paid to any outsider in case of equity finance. This increases the net income of the business which can be used to expand the scale of operations.

(v) Motivation: As in equity finance all the profit remain with the owner, so it gives him motivation to work more hard. The sense of inspiration and care is greater in a business which is financed by owner’s own money. This keeps the businessman conscious and active to seek opportunities and earn profit.

(vi) No Danger of Insolvency: As there is no borrowed capital so no repayment have to be made in any strict lime schedule. This makes the entrepreneur free from financial worries and there is no danger of insolvency.

(vii) Liquidation: In case of winding up or liquidation there is no outsiders charge on the assets of the business. All the assets remain with the owner.

(viii) Increasing Capital: Joint Stock companies can increases both the issued and authorized capital after fulfilling certain legal requirements. So in times of need finance can be raised by selling extra shares.

(ix) Macro Level Advantages: Equity finance produces many social and macro level advantages. First it reduces the elements of interest in the economy. This makes people Tree of financial worries and panic. Secondly the growth of joint stock companies allows a great number of people to share in its profit without taking active part in its management. Thus people can use their savings to earn monetary rewards over a long time.

Demerits of Equity Finance:

Following are the demerits of equity finance:

(i) Decrease in Working Capital: If majority of funds of business are invested in fixed assets then business may feel shortage of working capital. This problem is common in small scale businesses. The owner has a fixed amount of capital to start with and major proportion of it is consumed by fixed assets. So less is left to meet current expenses of the business. In large scale business, financial mismanagement can also lead to similar problems.

(ii) Difficulties in Making Regular Payments: In case of equity finance the businessman may feel problems in making payments of regular and recurring nature. Sales revenues sometimes may fall due to seasonal factors. If sufficient funds are not available then there would be difficulties in meeting short term liabilities.

(iii) Higher Taxes: As no interest has to be paid to any outsider so taxable income of the business is greater. This results in higher incidence of taxes. Further there is double taxation in certain cases. In case of joint stock company the whole income is taxed prior to any appropriation. When dividends are paid then they are again taxed from the income of recipients.

(iv) Limited Expansion: Due to equity finance the businessman is not able to increase the scale of operations. Expansion of the business needs huge finance for establishing new plant and capturing more markets. Small scales businesses also do not have any professional guidance available to them to extend their market. There is a general tendency that owners try to keep their business in such a limit so that they can keep affective control over it. As business is financed by the owner himself so he is very much obsessed with chances of fraud and embezzlement. These factors hinder the expansion of business.

(v) Lack of Research and Development: In a business which is run solely on equity finance, there is lack of research and development. Research activities take a long time and huge finance is needed to reach a new product or design. These research activities are no doubt costly but eventually when their outcome is launched in market, huge revenues are gained. But problem arises that if owner uses his own capital to finance such long term research projects then he will be facing problem in meeting short term liabilities. This factor discourages investment in research projects in a business financed by equity.

(vi) Delay in Replacement: Businesses that run on equity finance, face problems at the time of modernization or replacement of the capital equipments when it wears out. The owner tries to use the current equipments as long as possible. Sometimes he may even ignore the deteriorating quality of the production and keeps on running old equipment.

The Impact of Globalization on Taxation

Globalization can be defined as the process of increasing connectivity and uniting the worlds markets and businesses. Globalization has emerged the last couple decades as the internet has emerged, making it easier for people to travel, communicate, and do business internationally. When economies become more connected to other economies, they have increased opportunity but also increased competition. With Globalization evolving, more and more pro globalization and anti globalization lobbies have arisen. The pro globalization party argues that globalization brings about much increased opportunities for almost everyone, where the anti-globalization parties argue that certain groups of people who are deprived in terms of resources are not currently capable of functioning within the increased competitive pressure.

The Problem we face is that Globalization links the world’s major companies together and makes it more of a universal world. This may dramatically impact the majority of populations around the world because of the fact that many of these major companies find loopholes in the system and can hire accountants and lawyers and scheme their way around paying enormous amounts of tax whereas the average person is deprived of fair tax laws and the burden is placed on them to make up for the chunk of loss tax money. Multinational companies are well placed to exploit tax havens and hide true profits thereby avoiding tax. Through offshore tax havens and fraud, and through transfer pricing, billions of dollars go untaxed. Estimates range from $50 billion to $200 billion of revenue losses worldwide. These corporations use transfer pricing to make up for missing tax money by saying the revenues were utilized in selling a good or service to another company or subsidiary. It’s kind of compared to money laundering where criminals open business to say they make revenue through a good or service but in turn they are operating an illegal business but can tell the IRS they have made profit from something legal.

Many people wonder why taxation is so important. For rich countries like the United States, one main reason is that the less tax paid to the government means more for individuals, who are best placed to contribute to the economy. For poor countries it means they can determine their own route out of poverty. It’s also the way they can begin to free themselves from dependence on handouts and the punitive conditions attached to aid. Faced with the pressures of Globalization and the threat that companies will relocate unless given lower taxes, governments have responded by engaging in tax competition to attract and retain investment capital. In the US there is little evidence that state and local tax cuts when paid for by reducing public services stimulate economic activity or create jobs. Yet there is evidence that increases in taxes, when used to expand the quantity and quality of public services, can promote economic development and employment growth.

Globalization is thought to reduce the ability of governments to collect taxes. If labor and capital can move between jurisdictions, then attempts to tax these factors will lead to a vanishing taxpayer as factors flee from high to low tax regions. Most economists support globalization because it raises the incomes of peoples worldwide through a one world economy and a competitive business market from the richest to the poorest countries. In other words it creates a one world economy where not just four or five countries rein supreme it creates more balance to try and help the poorer countries prosper. Globalization has been happening for decades. The US government has already surrendered massive amounts of power political and economic power to global organizations such as the United Nations and the World Bank. Our economy has been emerging into a one world economy. If you look inside the United States many of our products sold in our stores are made from the other side of the world. Some people see globalization as sending millions of our jobs overseas and it is destroying the standard of living of America’s middle class. In the new global system, multinational corporations can shop for labor almost anywhere they want. So why should they give American workers good wages and good benefits when they can legally pay large numbers of workers on the other side of the globe slave labor wages and get away with it? For blue collar American workers, globalization has turned out to be a very, very bad deal as you can see with Detroit, Pittsburgh and many other manufacturing cities across the United States. Now since they must compete with slave labor in other countries, the labor of these blue collar workers has become greatly devalued. This is having a devastating impact on manufacturing in the United States.

Much of the jobs and industries that have been outsourced have gone to nations such as China. So what is the impact of Globalization on taxation and America? As capital and labor become more mobile and internationally dependent, international tax competition increases. With more jobs being shipped overseas and more and more Americans out of work and taxes increasing, it seems like our country has shifted their focus towards a Wal-mart state of mind. Sustainability is the plan for the our country and as far as tax competition it should bring more companies to poorer nations and leave Americans with fast food chains, Universal Health care and Wal-Mart. Globalization makes it harder for countries to tax at high rates because people and capital will flow out. As labor and capital become more mobile, international tax competition increases. With tax competition individuals and businesses gain the freedom to take advantage of low tax rates abroad. On the other side, Globalization could mean more trading and therefore more jobs created because more and different resources will be available to Americans. This could in turn open all types of new markets for Americans, which would create a new era of jobs for many unemployed Americans. Only the future will tell what the impact of globalization means to tax rates and American business. Until then, it seems sustainability may be the key to reviving a down-spiraling economy.

The P-O-S-D-C Of Management – A Student Aid

Pupils need every available edge when it comes to studies, whether they know it or not. They should take advantage of every bit of information available, i.e., research articles, white papers, periodicals, magazines, and yes…blogs.

This wee bit of information should prove useful to the aspiring business management, marketing, accounting, secretarial sciences, business law, and/or programming student(s). These extra tools will aid the student in his/her preparation for successful management endeavors. Management students will first need to know the P.O.S.D.C.’s of management.

PLANNING: the process of setting objectives and determining what needs to be done to successfully accomplish the assignment-mission of an organization.

ORGANIZING: the process of task assignment, the coordination of resources, team structuring, and work activities for the organization.

STAFFING: the process of building the team by attempting to attract and retain qualified people to the organization.

DIRECTING: the process that provides leadership, arranges motivational opportunities, and builds a good working environment.

CONTROLLING: the process of establishing enterprise-wide standards, analyzing results, measuring actual performance and monitoring to see whether standards have been met. Controlling also includes making the right decisions and corrective actions, if needed.

Students should also become familiar with the process of management and what is required to become a manager. The best managers are well informed and are acutely aware of team needs. The needs of the team are met with the managerial support reflecting alternatives and suggestions for a team coordinated solution.

The process of management involves planning, organization, leading, and controlling the use of resources to accomplish target performance goals. “All managers, regardless of title, level, type, and organizational setting(s), are responsible for the four functions. However, they are not accomplished linear, step-by-step fashion.” John R. Schermerhorn Jr., goes on to say…”The reality is that these functions are continually engaged as a manager moves from task to task and opportunity to opportunity in his or her work.”

While agreeing with Mr. Schermerhorn as well as several other experienced, teachers, and gurus of this profession, the ultimate goal of a manager is to help the company/organization achieve its highest performance with the utilization of resources, human and material.

Henry Mintzberg wrote, “Although the management process may seem straightforward, things are more complicated than they appear at first glance.” Ever-present e-mail and instant messages are added to his list of executive/managerial operations.

Remember my message “IT and BI”, the non-hyperbole of the marriage between Business Intelligence and Information Technology? “BI and IT virtually, methodically, and basically go arm-in-arm.” Just look around you. Technology and Management is everywhere. But in order to ascend to the highest level(s) in management, one must begin with the P.O.S.D.C. of management.

Happy Studies.

Til next time…

25 Examples of Finance Key Performance Indicators (KPI s) for Small Business

Key Performance Indicators (KPI s) help businesses of all sizes from a small business or SME to a much larger company or organisation define and measure progress toward business goals.

KPI s are quantifiable measurements, agreed at the outset, that reflect the critical success factors of a business or organisation. They will differ from business to business.

KPI s are a critical tool in helping to ensure a business is focused on achieving its desired goals.

There are many examples of KPI s but it is important to recognize that they will vary from business to business and will depend on the specific objectives of a business at a given point.

Finance related examples of KPI s may include any of the following 25 examples of KPI s which is not an exhaustive list:

  • Accounts Receivable Collection Period
  • Cash Flow Return on Investments (CFROI)
  • Cost Income Ratio
  • Cost per payslip issued
  • Creditor days
  • Cycle time to process payroll
  • Cycle time to resolve an invoice error
  • Debtor days
  • Direct costs
  • EBIT
  • Fixed costs
  • Gearing
  • Invoicing processing costs
  • Number of invoices outstanding
  • Number of overdue invoices
  • Percentage of bad debts against invoiced revenue
  • Percentage of financial reports issued on time
  • Percentage of invoices disputed
  • Percentage of invoices under query
  • Profit per customer
  • Profit per employee (FTE)
  • Profit per product
  • Profit per project
  • Return on capital employed (ROCE)
  • Return on Equity (ROE)

There are literally hundreds of KPI s that may or may not be applicable to your enterprise. The key is to identify the ones that a critical to the success of your enterprise.

KPI s are a very valuable performance management tool for sole traders and SMEs through to larger companies and international organisations. Sadly, the need for the use of KPI s is not as understood as it should be in SMEs so therefore are not used as often as they should be.

Small business or SME owners need not be afraid to embrace the use of Key Performance Indicators as there are a number of business to business consultant resources that are there to help a SME develop and identify a dashboard of the most relevant KPIs for their operations so that there is a true understanding of what drives the underlying profit performance which therefore increases the likelihood that an owner will be successful in meeting the stated goals and objectives for that enterprise. Knowledge is power as they say and monitoring KPI s provides that vital knowledge.

A Case Study of Lincoln Electric

Nine out of ten new businesses fail within their first year. This is an alarming statistic that may in fact be more of a myth than truth. However, recent data suggests the same trend just not as extreme. According to Brian Headd and data from the U.S. Census, a more realistic figure suggests that 62% of businesses close within the first six years of operation (Headd 2). This raises the question of: What makes a successful business? By analyzing and dissecting the intricacies of Lincoln Electric’s consistently stellar performance as well as paying close attention to several interesting financial pitfalls an answer can be found.

Value in the Individual

An organization at its core is made up of individuals and equipment. Now which of these has the most influence over the success of that organization? Most emphasis must be placed on the individual because he is the one that can be creative, motivated, skilled, efficient, and responsive. The proper function of management is to draw out these characteristics and encourage their growth in a productive setting. A large portion of Lincoln Electric’s (LE) success can be attributed to this unique and effective management style which ultimately leads to a competitive advantage. No matter the economies of scale a huge corporation such as GE can offer, the increased productivity level of a properly motivated individual production worker can easily compensate for it. This management style is further fostered through a combination of structural, strategic, and cultural norms within LE.

Structurally, Lincoln Electric aims to flatten the hierarchical structure and eliminate nonfunctional middle management positions. To do this, LE has fostered an “open-door” policy between production workers and executives as well as created an Advisory Board that has representatives of the workers who meet with executives twice a month. Strategically, LE pushes for an integrated approach of maximizing output and reducing costs. Though this seems straightforward and simple, the effectiveness is in the details. Cost reduction will be explored at a later time, but to maximize output, Lincoln Electric draws from its motivated employees. However, these employees are not naturally motivated. This is the role of James Lincoln’s Incentive Management System. This system provides a tool to motivate all employees through bonuses that redistribute a large portion of the corporation’s yearly profits. Two main results stem from this redistribution. First, there is a heightened sense of ownership in the company from top to bottom because if the company as a whole does well, everyone is compensated for it respectively.

Secondly, there is increased personal performance. This performance boost is the result of a sort of quiet competition within each work group. A specific bonus pool dollar amount is allotted to each work group, and the bonuses are then distributed to the members of that group according to their quantified relative performance on the semi-annual Merit Rating. Now the Merit Rating’s function is to counteract some of the pitfalls of a strategy based on speed and efficiency. Generally the result of an emphasis on speed is the sacrifice of quality and safety. Each tenet of the Merit Rating (including Dependability, Quality, Output, and Ideas/Cooperation) is a reaction to the common shortcomings of a traditional production worker. By being rewarded for attendance, work quality, and contribution of ideas on top of their piecework output leads to a well-rounded final product that is produced at the proper specifications in record time.

To further the speed of production, LE places a strong emphasis on idea generation and worker input. This allows for creative ideas and suggestions on the production process to be spread over the whole corporation. As a result, there is a strong and steady increase in LE’s productivity per worker. The Merit system also serves to increase coordination by rewarding teamwork while at the same time introducing an element that is historically known to be one of the greatest efficiency drivers of all time: competition. Though this seems like teamwork and competition would be in conflict, they are not. Since there are only a certain number of possible Merit Points available, competition over these points between members of the work group exists. However the total payoff at the end of the year is split up based on the profit of the corporation as a whole; therefore encouraging teamwork and idea sharing. This comprehensive Incentive Management System unifies the direction of the workforce and leads to a balanced and efficient set of goals that yields a strong competitive advantage over rival companies. In a commodity industry it is the process, not the product, that must prevail and be differentiated. Lincoln Electric has found the perfect process, but is it a universal process that can apply overseas?

Cost Reduction and Market Expansion

The blind pursuit of profit can easily lead to poor decision-making. That is why the means to creating income is vital. The question is how does a company increase margins? Two simple choices exist: Reduce costs, or increase output through expansion and efficiency. Lincoln Electric has identified this dynamic duo and integrated it into the general business strategy. To reduce costs, LE uses a variety of strong business tactics. There are three shifts on equipment, so it is constantly rotated and allows for no downtime on equipment. This prevents having excess capacity which leads to unnecessary overhead costs. Also, LE has aimed to flatten the structure of the company and eliminate levels of the organization that detract from the established open communication environment between workers and management. This reduces salary expenses and ultimately increases profit margin.

The concept of guaranteed employment is another brilliant cost-reducing idea of James F. Lincoln. The cost of retaining employees on payroll is less than the cost to recruit and train motivated and creative workers. As a result, during downturns, LE did not layoff workers but would retrain and deploy them elsewhere in the company. This would encourage loyalty to the company and highly reduce employee turnover, once again reducing cost to Lincoln Electric through a variety of quantitative as well as qualitative means. Lastly, there is the concept of limited benefits enhanced profits. This enhancement reflected back to bonuses and worker’s piecework compensation which put more control in the hands of the individual with the allotment of money and compensated for their lack of benefits. LE’s approach to maximizing output was explored previously, and the general consensus was a focus on developing a creative, motivated, and efficient production worker who consistently puts out more effort than a similar production worker in another firm. Another option to increase output is expansion into other markets.

Lincoln Electric first expanded to Canada by opening a manufacturing plant in Toronto in 1925. About twenty years later, LE Canada adopted the Incentive Management System (IMS) including its annual bonus and piecework facets. Due to the similar cultural norms between the U.S. and Canada, this adjustment flowed smoothly. However, poor decision-making led to this application of the IMS in other markets, including Europe and South America. Friction resulted because the cultural values of the production worker are different. Also, government regulation in Germany and Brazil led to major adjustments that undermined LE’s incentive efforts. In Europe, workers valued benefits such as vacation time over annual bonuses. It was discovered that annual bonuses did little to increase individual production efficiency without the piecework aspect of the IMS. Piecework was in fact illegal in Germany.

Obviously if more planning or research had been done, this crucial fact would have been discovered and LE would have avoided expansion into Germany. The root of Lincoln Electric’s troubles began with the quick expansionist mindset of George Willis. The main trouble was the speed of the expansion. LE incurred long-term financial debt for the first time in the corporation’s history. The added interest expense and permanent liability hurt future income statements heavily. A study of Lincoln Electric’s Consolidated Income Statement as well as the Balance Sheet reveals some interesting financial facts.

Starting in 1987, LE had no long-term debt. This skyrocketed along with the push for expansion in subsequent years to over $220 million in 1992. As the Income Statement suggests, the height of this long-term debt matches with the first net loss of Lincoln Electric. Failure to control spending and keep costs low (the historical competitive advantage of LE) undermined the desire to increase output through expansion. Another interesting fact is that as sales leveled off in 1992 and 1993, general costs and expenses failed to coincide so they continued to rise until 1994 which happens to also be the first posted net income after the losses of 1992-93.

This analysis of cost-reduction and market expansion raises several questions. How can Lincoln Electric prevent similar losses in the future? How closely correlated is the 1992-93 net loss with geographic expansion? What can Lincoln Electric do in the future to maintain its historical rapid growth and competitive advantage?


So decision time has come about Indonesia. Is Indonesia ready and willing to match up with Lincoln Electric’s strategy, or will it repel the incentives that are the key competitive differentiators? After analysis of Indonesia’s economic and financial situation, I recommend slow expansion into their welding market. The current distribution network of Tira and SSHJ should be altered so that it can be refined and expanded. Though smaller, SSHJ’s strategy coincides with LE’s more so than Tira’s strategy. I suggest using only SSHJ salespeople because they highlight the cost-savings and benefits of Lincoln Electric’s products while aiming to draw in new customers via LE’s name recognition and reputation for high-quality. LE should utilize cooptation to provide the company with local contacts and recommendations so that previous errors in incentive management can be addressed and altered. Exact details of my recommended Indonesian expansion are specified in the following list:

o Combination of piecework and salary with a salary representing a figure slightly lower than the average Indonesian manufacturing worker wage of 250,000 rupiah.

o No annual bonus because the economy is so shifty and volatile that it would most likely not affect daily effort.

o Guaranteed employment would exist through the understanding that economic change would not threaten a workers job. Job security would encourage intense loyalty and be a strong factor in building a consistent workforce.

With this comprehensive entry strategy into the Indonesian market, I feel that Lincoln Electric will only be met with success. This strategy encompasses the strongest aspects of LE’s Cleveland incentive system while tailoring it to be profit-maximizing in the specific Indonesian environment. Gillespie should have no worries as he presents these plans to his colleagues because the foundations of this plan are rooted in the historically successful traditions of Lincoln Electric, and have been adjusted to compensate for the differences that hindered previous global expansion.

Application Software in Business Activities

Business is any activity undertaken by an individual or a group of person with an intention to make profits. A business engages in various activities like planning of resource, scheduling of activities, coordinating and other managerial activities. All these have to be completed in time in order to generate maximum profit in the production. Prospective entrepreneurs should adhere to these objectives.

Much of business time is put waste when it handles its tasks through the use manual system. This necessitates to the use of the software, an automated means which is efficient-oriented. Examples of the software in business application include the Decision Support System, Transaction Processing system and Management Information System. They can be largely used in resource planning where an enterprise defines way to achievement.

Collaborative resource planning software provides the business people with adequate and reliable information. Marketing information and bureaucracy of the enterprise is unambiguous. Previous methods that contributed to the failures can be fully noted. This enables the enterprise to opt to use other successful means in use elsewhere. An efficient resource planning software helps you to generate and retrieve information about resource allocation in form of detailed niche reports. As a result, time as a resource is much conserved and can be used in other productive areas.

Boundaries are clearing defined by the software. The business is expected to work towards the laid limits by the legal authority, operational, technical, economic and social feasibility. Beyond the predetermined extents, no productive operation can be encountered.

Scheduling of activities is best in practice via use of the software. The order and the way in which operation is accurately developed by use of the program, this results into application of qualitative business techniques, where there is matching of skills and jobs to done. The enterprise standards of performance are maintained. Cases of underemployment or over employment are eradicated. In turn, employees’ are encouraged to exercise creativity and innovation in right of their propelling positions, and hence works towards achievement of objectives of the business.

Planning software makes efficient forecasting of resources. Unknown future is determined prior. Situations like inflation, competition increases government provision of subsidies and technological changes can be adequately known. The fallout is to relay strategies to deal with upcoming challenging matters.

Top echelons (management) benefits significantly in software application. Executives’ unstructured decisions are accurately established. They rapidly derive information from the software. For example, decisions on where to establish a new firm or a branch, whether there is funds to finance multiple projects.

Management need to store information in reliable source (in software). This is used for swift evaluation of business performance. They can decide to reward the best performing employees based on the results retrieved from the software. This motivates employees to work zeal and confidence. Their individuals objectives are harmonized to entire business objectives.

Managers use software to control the progress of activities. Those deviating from the predetermined plans can be precisely noted. Management can also rely on software for marketing of its products. Research on business competition like advertisement and efficient market penetration means is done in detail.

In conclusion, software suitable for effective planning of the business operations, scheduling of activities and other managerial activities. Without use of software, a business is considered to be running behind technology and operating at obsolete level.

Definition of Staffing

The managerial function of staffing is defined as filling, and keeping filled, positions in the organizations structure. This is done by identifying work-force requirements inventorying the people available, and recruiting, selecting, placing, promoting, apprising, planning the careers of, compensating, and training or overviews developing both candidates and current jobholders so that they can accomplish their task effectively and efficiently. It is clear that staffing must be closely linked to organizing, that is, to the setting up of international structures of rules and positions. Many writers on management theory discuss staffing as a phase of organizing.

First, the staffing of organizational roles includes knowledge and approaches not usually recognized by practicing manager, who often think of organizing as just setting up structures of roles and give little attention to filling these roles. Second, making staffing a separates function facilitates placing an even greater emphasizes on the human elements selection, appraisal, and planning and manager development. Third, an important body of knowledge and experience has been developed in the area of staffing. The fourth season for separating staffing is that managers often overlook the fact that staffing is their responsibility-not that the personnel department. To be sure this department provides valuable assistance, but it is the job of manager to fill the positions in their organizations and keep them filled with qualified people.

Defining the Managerial Job

Complete agreement does not exist as to what exactly constitutes the job of a manager. In fact, the nature of managerial tasks has been studied from several different perspectives. One group of writers known as the great man school, studied successful manager and described their managerial behaviors and habits. Although the stories about these people are interesting the authors usually do not provide an underlying theory explain the success of their subjects. Other writers primarily economists focus on the entrepreneurial aspects of managing. Their main concern is profit maximizations, innovation, risk taking and similar activities. Yet another group of writers emphasizes decision making, especially the kinds of decisions that cannot be easily programmed. An additional view of managerial job draws attention to leadership, with an emphasis on particular traits and managerial styles. Closely related to this approach is the discussion about the power influence that is the leader’s control of the environment and subordinates. Others writers focus their attention on the behavior of leaders by examining the content of the manager’s job. Finally the approach favored by Henry Mintzberg is based on observing the work activities of managers. He found through observation of five executives that their works was characterized by brevity, variety, and discontinuity and action orientation. He also noted that executives favor oral communication and that the engage in many activities that link the enterprise with its environment.

Factors Affecting the Number and kind of Managers Required

The number of managers needed in an enterprise depends not only on its size but also on the complexity of the organizations structure, the plans for expansion, and the rate of turnover of managerial personnel. The ratio between the number of managers and the number of employee does not follow any law. It is possible by enlarging or contracting the delegation of authority, to modify a structure so that the number of managers in a given instance or decrease regardless of the size of the operation. Although the need for determining the number of managers required has been stressed here, it is clear that numbers are only part of the picture. Specifically, the qualifications for individual positions must be identified so that the best-suited managers can be chosen.

The Management Inventory

It is common for any business, as well as for most non business enterprise, to keep an inventory of raw materials and goods on hand to enable it to carry on its operations. It is far less common for enterprise to keep an inventory of available human resources, particularly managers, despite the fact that the required number of competent managers is a vital requirement for success. Keeping abreast of the management potential within firm can be done by the use of an inventory, which is simply an organizations chart of a unit with managerial position indicated and keyed as to the promo ability of each incumbent.

Advantages and Limitations of the Manager Inventory Chart

  • The manager inventory chart, as seen from the preceding discussion, has certain general advantages.
  • The chart gives an overview of the staffing situations of an organization.
  • Managers who are ready for promotion can now be easily identified. Prompt action in finding a suitable position within the organization may reduce the propensity of managers to seek employment outside the company.
  • The chart also shows the future internal supply of managers by indicating who is promotable in a year or more.
  • Managers who do not perform satisfactorily are identified, and the need for training or replacement is indicated.
  • If the organization has insufficient “depth” requirement and training plans can be initiated immediately to ensure the future supply of managers.
  • Managers who are close to retirement can be identified, and preparation can be made for their replacement.
  • The chart facilitates the transfer of managers not only to strengthen weak department but also to broaden the manager’s experience.
  • One can identify prevent the hoarding of promotable people by their immediate superiors, a practice quite common, especially in large enterprises. Naturally superiors dislike depriving themselves of able subordinates by letting them transfer to other organizational units. But the overall interest of the enterprise is more important than the self-interest of an individual manager.
  • Managers can counsel subordinates about their career paths and relate them employment opportunities within the company.

Despite its many advantages, the manager inventory chart also has some limitations:

The chart does not show to what positions the manager may be promotable, if an opening occurs in another organizational unit; the person who is promotable now will not necessarily be able to fit this position, since knowledge or skills may be required in specialized areas. A promotable manager in a production department can hardly fill the job of vice president of sales.

The data show on the chart is not sufficient for making a fair assessment of all the capabilities of individuals. It is still necessary to keep records of each individual’s skill, performance, and other biographical information.

Although the chart is useful for counseling subordinates, it is often not practical to share the information will all employees. Instead, only the top manager of a division or a department may have this information available.

It takes time and effort to keep the chart up to date.

Upper- level managers may be reluctant to make their charts available to other upper-level managers because they may be afraid they will lose competent subordinates to other organizational units.

Situational Factors Affecting Staffing

Specifically, external factors include the level of education the prevailing attitudes in society (such as the attitude toward work), the many laws and regulation that directly affect, staffing, the economic conditions, and the supply of and demand for managers outside the enterprise. There are many internal factors that affect staffing. They include, for example, organizational goals, tasks, technology, organization structure the kind of employed by the enterprise, the demand for and the supply for managers within the enterprise, the reward system and various kinds of policies. Some organizations are highly structured; others are not. For some positions-such as the position of a sales manager-skill in human relations may be of vital importance, while the same skill may be less critical for a research scientist working fairly independently in the laboratory. Effective staffing then requires recognition of, any external and internal situational factors, but the focus here is on those that have a particular relevance to staffing.

The External Environment

Factors in the external environment do affect staffing to various degrees. These influences can be grouped into educational, sociocultural, legal-political, and economic constraints or opportunities. For example, the high technology used in many industries requires extensive and intensive education. Similarly, managers in the industries requires extensive and intensives education. Similarly, managers in the sociocultural environment in the United States generally do not accept orders blindly; they want to become active participants in the decision making process. Furthermore, now and in the future, managers will have to be more ordinate toward the public than they have been in the past, responding to the public’s legitimate needs and adhering to high ethical standards. The economic environment including the competitive situation-determines the external supply of, and the demand for managers. Legal and political constraints require that firms follow laws and guidelines issued by various level of government.

Equal employment opportunities: several laws have been passed that provide for equal employment opportunity (EEO). The laws prohibit employment practices that discriminate on the basis of race, color, religion, national origin, sex, or age (in specified age ranges). EEO is based on federal, state, and local laws, and these laws impact on staffing. Recruitment and selection for promotion must be in compliance with these laws. This means that managers making decisions in these areas must be knowledgeable about the laws and the way they apply to the staffing function.

Women in Management: in the last decade or so, women have made significant progress in obtaining responsible positions in organizations. Among the reasons for this development are laws governing fair employment practices, changing social attitudes toward women in the workplace, and the desire of companies to project a favorable image by placing qualified women in managerial positions. Opportunities for women occupying managerial positions are increasing. But career advancements may depend on the functional area, on the kind of industry, or on particular companies. Women are likely to be found at upper levels of management in areas such as personnel and public relations. Certain industries provide faster advancement opportunities than others. Financial services institutions, such as banks and relating firms, which traditionally employed large percentages of women, also have more women in managerial positions.

Evidence indicates that women also have some difficulty making it to the top. For example, no women are major candidates for the position of chief executive officer in the fortune five hundred corporations. Discrimination has been given as one reason, according to a Fortune article. On the other hand, women`s representation on boards of directors is increasing. Nevertheless, the total number of women serving on boards is still rather small.

Staffing in the International Environment: one must look beyond the immediate external environment, and recognize the worldwide changes brought about primarily, by advanced communication technology and by the existence of multinational corporations. It is not unusual for large international firms to have top management teams composed of managers of many different nationalities. The geocentric attitude is the basis for viewing the organization as a worldwide entity engaged in global decision making, including staffing decision. Companies have three sources for staffing he positions in international operations: (1) managers from the home country of the firm, (2) managers from the host country, and (3) managers from a third country. In the early stage of the development of an international business, managers were often select from the home country. Some of the reasons include the manager’s experience at the home office and their familiarity with products, personnel, enterprise goals and policies, and so on. This facilitates not only planning but also control. On the other hand, the home-country national may be unfamiliar with the language or the environment of the foreign country. Moreover, it is usually more expensive to send managers and their families abroad. For the family, it is often difficult to adjust to the new environment of a foreign country. Also, host courtiers may pressure the parent firm to employ host country managers.

Manager who are host country nationals do speak the language and are familiar with the country`s environment. Employing them is generally less costly, and it may not require relocating them and their families. The problem is that those managers may not be familiar with the firm’s products and operations, and thus control may be more difficult.

The other alternative is to employ third country nationals, who often are international career managers. Still, the host country may prefer to have its own nationals in the positions of power. Professor Arvin Phatak has voiced caution in selecting managers from countries that had political conflicts in the past, such as India and Pakistan or Greece and turkey. There are of course, many other factors that have to be taken into account when operating abroad, as illustrated in the perspectives on differences in the workweek in various countries.

Is Export Trade Finance Important Today?

For businesses concentrating only on the domestic market, they may miss out on different opportunities the international market offers. If you make a foray into the international market, you may increase your profit as well as protect your business from the negative effects of slowed-down growth. Apart from that, this will allow you to diversify your portfolio.

Among the most crucial ingredients for success in the exportation business is export trade finance. Exporters want to get paid for their products as fast as possible. On the other hand, customers from foreign markets would want to delay payment until they’ve received the products or perhaps resold these. To become competitive, your company must be capable of offering payment terms which are very attractive to possible partners.

Important Factors To Consider When Selecting The Best Financing Option

The amount of time in which the product is financed – This is considered the most important factor to consider. Experts highly emphasized that your choice of financing will be greatly influenced by how long you’ll wait before receiving the payment.

The cost of financing options – If there are several financing options to choose from, you have to look into them meticulously, most especially the interest rates. Be reminded that these costs can greatly influence the products’ price along with your potential profit.

Risks – Transactions are not created equal. There are those that are riskier than others. Experts have emphasized that the riskier the transaction is, the more you’ll find it hard to finance. Economic and political stability can actually compound or increase these risks.

Amount of orders – If you are receiving plenty of orders, your working capital might not be sufficient to meet such increased demand.

Getting Expert Help

You can actually get help from commercial banks with an international department when it comes to dealing with the export trade finance needs of your company. Choose banks that are familiar with the export business. These banks will provide your firm with a wide range of international banking services.

After finding this kind of bank, consider scheduling a visit with the international department for you to know and be aware of the different matters like your export plan, banking facilities, services, and the applicable charges. In case your partner importer fails to pay for the transaction, your business will bear the responsibility of paying for the loan. With the use of instruments like letters of credit as well as credit insurance, you and your chosen bank can greatly benefit from the improvement of the export receivables’ quality.

Effective Leverage and Optimal Capital Structure

How do small firms choose their capital structure? When is it appropriate for a small business to fund its operations with borrowed funds? What is the nature and function of effective leverage in financial management? These questions relate to the optimal capital structure of a business enterprise-the appropriate mix of debt and equity that maximizes the return on investment and shareholders’ wealth while minimizing the cost of capital, simultaneously. Clearly, effective leverage is vital to a sound business strategy designed to maximize the wealth producing capacity of the enterprise. In these series on effective financial management, we will focus on the pertinent financing strategic questions and provide some guidance. The overriding purpose of this article is to highlight some basic financial theory and industry practice in effective financial leverage. For specific financial management strategies please consult a competent professional.

Please note that the appropriate amount of financial leverage for each firm differs markedly based on the overall industry dynamics, market structure-level of competition, stage of industry life cycle, and its market competitive position. Indeed, as with most market indicators firm-specific leverage position is insightful only in reference to the industry expected value (average) and generally accepted industry benchmarks and best practices.

Types of Leverage:

Financial Leverage: Degree of financial leverage is the ratio of the EBIT/EBT-earnings before interest and taxes divided by earnings before taxes. When a business relies on borrowed funds for its operations-the financial leverage is created as the business incurs fixed financial obligations or interests on the borrowed funds. A given percentage change in the firm’s operating income (EBIT) produces a larger percentage change in the firm’s net income (NI) and earnings per share. Indeed, a small percentage change in operating income (EBIT) is magnified into a larger percentage reduction in net income. The degree of financial leverage (DFL) measures a firm’s exposure to financial risk or the sensitivity of earnings per share (EPS) to changes in EBIT. Therefore, DFL indicates the percentage change in earnings per share (EPS) emanating from a unit percent change in earnings before interest and taxes (EBIT). In general, a firm’s short-term financing needs are influenced by current sales growth and how effectively and efficiently the firm manages its net working capital-current assets minus current liabilities. Note that ongoing short-term financing needs may reflect a need for permanent long-term financing including an evaluation of the appropriate mix and use of debt and equity-the capital structure.

Operating Leverage: Fixed operating costs, such as general administrative overhead expenses, contractual employees’ salaries, and mortgage or lease payments create operating leverage and tend to elevate business risk. The impact of operating leverage is evident when a given percentage changes in net sales results in a greater percentage change in operating income (EBIT)-earnings before interest and taxes. Operating leverage is calculated as follows: DOL = CM/EBIT-contribution margin divided by earnings before interest and taxes or percentage change in EBIT divided by percentage change in sales (revenues).

Combined Leverage: Degree of combined leverage (DCL) is the combination of the effects of business risk and financial risk. Degree of operating leverage (DOL) and degree of financial leverage (DFL) combine to magnify a given percentage change in sales to a potentially much greater percentage change in earnings or operating income (EBIT). There is a direct relationship among the degrees of operating leverage (DOL), financial leverage (DFL) and combined leverage (DCL). A firm’s degree of combined leverage (DCL) = DOL X DFL or CM/EBIT X EBIT/EBT that is CM/EBT. The degree of combined leverage (DCL) may also be calculated as percentage change in EPS divided by percentage change in sales that is the percentage change in earnings per share emanating from a unit percent change in sales volume.

Optimal Capital Structure: This is the appropriate use of debt and equity that minimizes the firm’s cost of capital and maximizes its stock price. Please note that a non-optimal capital structure or lack of optimal debt and equity mix may lead to higher financing costs and the firm may reject some capital budgeting projects that would have increased shareholders’ wealth with an optimal financing. Further, the effects of different capital structures and differing degrees of business risk are reflected in a firm’s income statement. Please note that operating leverage tends to magnify the effect of fluctuating sales (revenues) and produce a percentage change in operating income (EBIT) larger than the change in sales (revenues) while financial leverage tends to magnify the percentage change in EBIT and produce a larger percentage change in EPS. Therefore, a change in sales (revenues) through operating leverage affects EBIT. This change in EBIT through the effect of financial leverage subsequently affects EPS.

Some Useful Guidelines:

When a firm grows, it needs capital which may be funded by equity or debt. Debt financing has costs and benefits. Debt has two significant benefits: Interest paid is tax deductible, which minimizes debt’s effective cost; and debt carries a fixed charge, so stockholders do not have to share their net income if the enterprise is extremely profitable. On the other hand, high debt ratio indicates higher risk and hence higher cost of capital; and if the firm fails to earn sufficient income to cover its fixed charges it must produce the shortfall or face bankruptcy. Therefore, firms with volatile earnings and operating cash flows must limit their use of debt financing. Certainly, effective cash flow and leverage management is critical to prudent and sound strategy designed to maximize the wealth producing capacity of the enterprise. Additionally, strategic analysis, market analysis and financial analysis should be internally consistent and congruent. The EBIT/EPS analysis allows a firm to evaluate the effects of different capital structure on operating income and the level of business risk. The variability of sales or revenues over time is a basic operating risk. Please note that in capital budgeting for a specific project to increase shareholders’ wealth, it must earn more than its cost of capital or hurdle rate.

In practice, firms tend to use target capital structure-a mix of debt, preferred stock, and common equity with which the enterprise plans to raise needed funds. And because capital structure policy involves a strategic trade-off between risk and expected return, the optimal capital structure policy must seek a prudent and informed balance between risk and return. The firm must consider its business risk, tax position, financial flexibility and managerial conservatism or aggressiveness. While these factors are crucial in determining the target capital structure, operating conditions may cause the actual capital structure to differ markedly from the optimal capital structure. Therefore, the target capital structure should be used as a guide toward an ideal capital structure that minimizes the weighted average cost of capital (WACC) while maximizing the shareholders’ wealth.