Tag: Banking Operations and Innovations Bangalore University BBA Notes

Equity finance is generally the issue of new shares in exchange for a cash investment. Your business receives the money it needs and the investor will own a share in your company. This means the investor will benefit from the success of your business.

The most common types of equity investors include:

• Angel investors and angel networks
• Friends and family
• The crowd (through crowdfunding platforms)
• Government funds
• Private equity funds
• Venture capitalists
• Corporates (directly or through venturing arms)

Major Sources of Equity Financing

When a company is still private, equity financing can be raised from angel investors, crowdfunding platforms, venture capital firms, or corporate investors. Ultimately, shares can be sold to the public in the form of an IPO.

1. Angel investors

Angel investors are wealthy individuals who purchase stakes in businesses that they believe possess the potential to generate higher returns in the future. The individuals usually bring their business skills, experience, and connections to the table, which helps the company in the long term.

2. Crowdfunding platforms

Crowdfunding platforms allow for a number of people in the public to invest in the company in small amounts. Members of the public decide to invest in the companies because they believe in their ideas and hope to earn their money back with returns in the future. The contributions from the public are summed up to reach a target total.

3. Venture capital firms

Venture capital firms are a group of investors who invest in businesses they think will grow at a rapid pace and will appear on stock exchanges in the future. They invest a larger sum of money into businesses and receive a larger stake in the company compared to angel investors. The method is also referred to as private equity financing.

4. Corporate investors

Corporate investors are large companies that invest in private companies to provide them with the necessary funding. The investment is usually created to establish a strategic partnership between the two businesses.

5. Initial public offerings (IPOs)

Companies that are more well-established can raise funding with an initial public offering (IPO). The IPO allows companies to raise funds by offering its shares to the public for trading in the capital markets.

Advantages of Equity Financing

Access to business contacts, management expertise, and other sources of capital

Equity financing also provides certain advantages to company management. Some investors wish to be involved in company operations and are personally motivated to contribute to a company’s growth.

Their successful backgrounds allow them to provide invaluable assistance in the form of business contacts, management expertise, and access to other sources of capital. Many angel investors or venture capitalists will assist companies in this manner. It is crucial in the startup period of a company.

Alternative funding source

The main advantage of equity financing is that it offers companies an alternative funding source to debt. Startups that may not qualify for large bank loans can acquire funding from angel investors, venture capitalists, or crowdfunding platforms to cover their costs. In this case, equity financing is viewed as less risky than debt financing because the company does not have to pay back its shareholders.

Investors typically focus on the long term without expecting an immediate return on their investment. It allows the company to reinvest the cash flow from its operations to grow the business rather than focusing on debt repayment and interest.

Disadvantages of Equity Financing

Lack of tax shields

Compared to debt, equity investments offer no tax shield. Dividends distributed to shareholders are not a tax-deductible expense, whereas interest payments are eligible for tax benefits. It adds to the cost of equity financing.

In the long term, equity financing is considered to be a more costly form of financing than debt. It is because investors require a higher rate of return than lenders. Investors incur a high risk when funding a company, and therefore expect a higher return.

Dilution of ownership and operational control

The main disadvantage to equity financing is that company owners must give up a portion of their ownership and dilute their control. If the company becomes profitable and successful in the future, a certain percentage of company profits must also be given to shareholders in the form of dividends.

Many venture capitalists request an equity stake of 30%-50%, especially for startups that lack a strong financial background. Many company founders and owners are unwilling to dilute such an amount of their corporate power, which limits their options for equity financing.

Tasks of a Professional Manager

Specialization in every field, technological advancement, globalization of business results into appointment of qualified managers. They can be called as professional managers.

A professional manager is an expert, trained and experienced enough to adeptly manage any type of organization be it a manufacturing house, a service organization, a hospital or a government agency. Professional managers:

• Are objective, focussed and performance oriented.
• Help in meeting competitive challenges of business.
• Are creative and dynamic.
• Follow management practices based on world wide experiences and information.
• Apply theories of management to solve emerging organizational problems.

Providing direction to the firm: The first task, envisioning goals, is one of the tasks that should never be delegated. This is the ability to define overarching goals that serve to unify people and focus energies. It’s about effectively declaring what’s possible for the team to achieve and compelling them to accomplish more than they ever thought possible.

Managing survival and growth: Ensuring survival of the firm is a critical task of a manager. The manager must also seek growth. Two sets of factors impinge upon the firm’s survival and growth. The first is the set of factors which are internal to the firm and are largely controllable. These internal factors are choice of technology, efficiency of labour, competence of managerial staff, company image, financial resources, etc. The second set of factors are external to the firm like government policy, laws and regulations, changing customer tastes, attitudes and values, increasing competition, etc.

Maintaining firm’s efficiency: A manager has not only to perform and produce results, but to do so in the most efficient manner. The more output a manager can produce with the same input, the greater will be the profit.

Meeting the competition challenge: A manager must anticipate and prepare for the increasing competition. Competition is increasing in terms of more producers, products, better quality, etc.

Innovation: Innovation is finding new, different and better ways of doing existing tasks. To plan and manage for innovation is an on-going task of a manager. The manager must maintain close contact and relation with customers. Keeping track of competitor’s activities and moves can also be a source of innovation, as can improvements in technology.

Renewal: Managers are responsible for fostering the process of renewal. Renewing has to do with providing new processes and resources. The practices and strategy that got you where you are today may be inadequate for the challenges and opportunities you face tomorrow.

Building Human Organization: Man is by far the most critical resource of an organization. A good worker is a valuable asset to any company. Every manager must constantly look out for people with potential and attract them to join the company.

Leadership: Organizational success is determined by the quality of leadership that is exhibited. “A leader can be a manager, but a manager is not necessarily a leader,” says Gemmy Allen (1998). Leadership is the power of persuasion of one person over others to inspire actions towards achieving the goals of the company. Those in the leadership role must be able to influence/motivate workers to an elevated goal and direct themselves to the duties or responsibilities assigned during the planning process. Leadership involves the interpersonal characteristic of a manager’s position that includes communication and close contact with team members. The only way a manager can be acknowledged as a leader is by continually demonstrating his abilities.

Change management: A manager has to perform the task of a change agent. It’s the managers task to ensure that the change is introduced and incorporated in a smooth manner with the least disturbance and resistance.

Selection Information technology: Today’s managers are faced with a bewildering array of information technology choices that promise to change the way work gets done. Computers, the Internet, intranets, telecommunications, and a seemingly infinite range of software applications confront the modern manager with the challenge of using the best technology.

Role of a manager

Different managers perform at different levels and require different skills. To meet the demands of performing their functions, managers assume multiple roles. A role is an organized set of behaviors. Henry Mintzberg has identified ten roles common to the work of all managers. The ten roles are divided into three groups: interpersonal, informational, and decisional.

Interpersonal Roles

The three interpersonal roles are primarily concerned with interpersonal relationships. By assuming these roles, the manager also can perform informational roles, which, in turn, lead directly to the performance of decisional roles.

In the figurehead role, the manager represents the organization in all matters of formality. Some examples of the figurehead role include a college dean who hands out diplomas at graduation, a shop supervisor who attends the wedding of a subordinate’s daughter, and the CEO who cuts the ribbon on a new office building.

The leader role defines the relationships between the manger and employees. It involves directing and coordinating the activities of subordinates. It may involve; hiring, training, motivating, and encouraging employees. First-line managers, in particular, feel that effectiveness in this role is essential for successful job performance.

The liaison role involves managers in interpersonal relationships outside of their area of authority. This role may involve contacts both inside and outside the organization. The top-level manager uses the liaison role to gain favors and information, while the supervisor uses it to maintain the routine flow of work.

Informational Roles

Receiving and communicating information are perhaps the most important aspects of a manager’s job. There are three informational roles in which managers gather and disseminate information.

As monitor, the manager constantly looks for information that can be used to advantage. The information gathered might be competitive moves that could influence the entire organization or the knowledge of whom to call if the usual supplier of an important part cannot fill an order.

In the disseminator role, the manager distributes to subordinates important information that would otherwise be inaccessible to them. Example: The president of a firm may learn during a lunch conversation that a large customer of the firm is on the verge of bankruptcy. Upon returning to the office, the president contacts the vice president of marketing, who in turn instructs the sales force not to sell anything on credit to the troubled company.

In the role of spokesperson, the manager disseminates the organization’s information into its environment. Thus, the top-level manager is seen as an industry expert, while the supervisor is seen as a unit or departmental expert.

Decisional Roles

According to Mintzberg, there are four decisional roles the manager adopts. In the role of entrepreneur, the manager tries to improve the unit. For example, when the manager receives a good idea, he or she launches a development project to make that idea a reality.

In the disturbance handler role, the manger deals with threats to the organization. Examples: An emergency room supervisor responds quickly to a local disaster, a plant supervisor reacts to a strike, etc.

The resource allocator role places a manager in the position of deciding who will get what resources. These resources include money, people, time, equipment, and information. This is one of the most critical decisional roles. Example: A college dean must decide which courses to offer next semester, based on available faculty.

Managers spend a great deal of their time as negotiators, because only they have the information and authority that negotiators require. The negotiations may concern work, performance, objectives, resources, or anything else influencing the unit. Examples: A company president works out a deal with a consulting firm; A front line supervisor may negotiate for new typewriters.

Skills of a Manager

A skill is the learnt capacity or talent to carry out pre-determined results often with the minimum outlay of time, energy, or both1. In other words, a skill is an ability or proficiency that a person possesses that permits him or her to perform a particular task.

Analytical Skills

These skills are the abilities to identify key factors and understand how they interrelate, and the roles they play in a situation. Analytical skills involve being able to think about how multiple complex variables interact, and to conceive of ways to make them act in desirable manner.

Technical Skills

Technical skill is the ability to use specific knowledge, techniques, and resources in performing tasks. Examples of technical skills are writing computer programs, completing accounting statements, analyzing marketing statistics, writing legal documents, or drafting a design for a new airfoil on an airplane. Technical skills are usually obtained through training programs that an organization may offer its managers or employees or may be obtained by way of a college degree. Indeed, many business schools throughout the country see their role as providing graduates with the technical skills necessary for them to be successful on the job.

Decision Making skills

These skills are present in the planning process. A manager’s effectiveness lies in making good and timely decisions and is greatly influenced by his or her analytical skills.

Digital Skills

These are important because using digital technology substantially increases a manager’s productivity. Computers can perform in minutes tasks in financial analysis, HRP, and other areas that otherwise take hours, even days to complete.

Human Skills

Human skill involves the ability to interact effectively with people. Managers interact and cooperate with employees. Human skills, therefore, relate to the individual’s expertise in interacting with others in a way that will enhance the successful completion of the task at hand.

Conceptual Skills

Conceptual skill is the ability to see the “big picture,” to recognize significant elements in a situation, and to understand the relationship among the elements. Examples of situations that require conceptual skills include the passage of laws that affect hiring patterns in an organization, a competitor’s change in marketing strategy, or the reorganization of one department which ultimately affects the activities of other departments in the organization.

Communications Skills

Effective communication is vital for effective managerial performance. The skill is critical to success in every field. Communication skills involve the ability to communicate in ways that other people understand, and to seek and use feedback from employees to ensure that one is understood.

Design Skills

It is the ability to solve problems in ways that will benefit the organization. To be effective, particularly at upper levels, mangers must be able to do more than see a problem. They must also be able to design a workable solution to the problem.

Inflation accounting comprises a range of accounting models designed to correct problems arising from historical cost accounting in the presence of high inflation and hyperinflation. For example, in countries experiencing hyperinflation the International Accounting Standards Board requires corporations to implement financial capital maintenance in units of constant purchasing power in terms of the monthly published Consumer Price Index. This does not result in capital maintenance in units of constant purchasing power since that can only be achieved in terms of a daily index.

Inflation Accounting Methods

There are two main methods used as inflationary accounting methods. The first is current purchasing power (CCP), and the second, being current cost accounting (CCA).

The current purchasing power method involves adjusting the financial statements and associated numbers to the current price. For non-monetary items, this is done by taking the historical figures and applying a specific conversion rate based on a price index.

The conversion rate is found by dividing the index price at the end of the period by the index price at the beginning of the period. Monetary items are subject to a net gain or loss during adjustment.

The current cost accounting method takes the fair market value (FMV) instead of the historical cost. With this method, all monetary and non-monetary assets must be adjusted to their current values.

Current Purchasing Power (CPP)

Under the CPP method, monetary items and non-monetary items are separated. The accounting adjustment for monetary items is subject to the recording of a net gain or loss. Non-monetary items (those that do not carry a fixed value) are updated into figures with a conversion factor equivalent to price index at the end of the period divided by price index at the date of transaction.

Current Cost Accounting (CCA)

The CCA approach values assets at their fair market value (FMV) rather than historical cost, the price incurred during the purchase of the fixed asset. Under the CCA, both monetary and non-monetary items are restated to current values.

The Inflation Accounting Process

The measurement of income from continuing operations on a current cost basis requires the accountant to complete the following steps:

• Measure the cost of goods sold as of the date sold, using either its current cost or lower recoverable amount, or when those resources are used on or at least committed to a designated contract.
• Measure depreciation, amortization, and depletion based on either the average current cost of the service potential of the underlying fixed assets or their lower recoverable amount during the usage period.