LEVERAGES

The employment of an asset or source of funds for which the firm has to pay a fixed cost or fixed return maybe termed as leverage.

OPERATING LEVERAGE – Operating Leverage may be defined as the firm’s ability to use fixed operating costs to magnify the effects of changes in sales on its earnings before interest and taxes.

FINANCIAL LEVERAGE – Financial Leverage can be defined as the ability of a firm to use fixed financial charges to magnify the effects of changes in EBIT on the earnings per share.

i). Operating Leverage results from the existence of fixed operating expenses in the firm’s income stream whereas Financial Leverage results from the presence of fixed financial charges in the firm’s income stream.

ii). Operating Leverage is determined by the relationship between a firm’s sales revenues and its earnings before interest and taxes. (EBIT)Financial Leverage is determined by the relationship between a firm’s earnings before interest and tax and after subtracting the interest component.

iii). Operating Leverage = Contribution / EBIT

Financial Leverage = EBIT / EBT

iv). Operational Leverage relates to the Assets side of the Balance Sheet, whereas Financial Leverage relates to the Liability side of the Balance Sheet. v). Operational Leverage affects profit before interest and tax, whereas Financial Leverage affects profit after interest and tax.

vi). Operational Leverage involves operating risk of being unable to cover fixed operating cost, whereas Financial Leverage involves financial risk of being unable to cover fixed financial cost.

vii). Operational Leverage is concerned with investment decisions, whereas Financial Leverage is concerned with financing decisions.

viii). Operating Leverage is described as a first stage leverage, whereas Financial Leverage is described as a second stage leverage.

CASH BUDGETING

a)      Cash Budget shows the policy and programme of cash inflows and outflows to be followed in a future period under planned condition.

b)      Cash Budget usually of 2 parts gives detailed estimate of cash receipts and cash distribution. Estimate of cash receipts budget on cash incoming. Estimate of cash distribution based on cash outgoing.

c)      Cash Budget is a tool of control since it represents actions which can be shaped to will so that it can be suited in the conditioning which may or may not happen.

d)     Cash Budget begins when Cash Forecasting ends. Cash Forecasting is convince in Cash Budget.

e)      Cash Budget has a limited scope.

f)       Cash Budget denotes a definite target.

CASH FORECASTING:

1. Cash Forecast is a main estimate of cash balance likely to happen under anticipated conditions using a specified period of time.

2. Cash Forecasting is an estimate showing amt of cash which would be available in future period.

3. Cash forecast being statement of future event does not connote any sense of control.

4. Cash Forecasting is a preliminary step for Cash Budgeting. It ends with the forecast of likely cash balances.

5. Cash Forecast is a wider scope.

6. Cash Forecasting denotes some degree of flexibility.

WHAT IS COMMERCIAL PAPER?

A company can use commercial papers to raise funds. It is a promissory note carrying the undertaking to repay the amount on or after a particular date. Normally it is an unsecured means of borrowing and the companies are allowed to issue commercial papers as per the regulations issued by SEBI and Company’s Act. Some of them are:

• Minimum size 25 Lacs
• Maximum limit is 100% of working capital limit.
• Period is from 15 days to 1 year, and every renewal is treated as a fresh commercial paper.
• While using Commercial Paper, company should ensure that its net worth is at least 4 crores or more and it has been noted by at least 2 rating agencies like CRISIL, ICRA, CARE.

Commercial papers on maturity are to be honoured at face value and the registrars or the issue agencies lay down all the formalities of funding through commercial papers