Assignment on the

“Things that we learned from this course and way

of explore these in business organizations”

Course No: FIN 503

Course Title: Intermediate Financial Management

Section: 1, Fall-2010

Prepared For

Dr. Tanbir Ahmed Chowdhury

Course Instructor

Prepared By

Md. Raihanul Aktar

( ID# 2009-1-95-056 )

Date of Submission: 13 December, 2010

From the introductory chapter we have learned that always the goal of a corporation should be wealth maximization objective rather than profit maximization. Because profit maximization objective does not consider Time Value of Money, longevity of project, maximization of Share Price and corporate social responsibility.We also learned that the conflict that frequently happens between managers and owners are generally known as agency problem.So, in order to minimize this agency problem usually the following procedures are taken. These are :

(1)  Market Forces :Under this approach firstly we need to elect the Board Of Directors and then give them the empowerment to hire or fire. In addition they also have the power to expel under performing management as well as providing threat of hostile takeover to the management to perform in the best interest of the shareholders otherwise the owner may think about the possibility of a hostile takeover.

(2)Agency Costs :

A conflict of interest arising between creditors, shareholders and management because of differing goals. It is defined by the costs borne by stockholders to prevent or minimize agency problem. For example, an agency problem exists when management and stockholders have conflicting ideas on how the company should be run. Through the following four types we can perform the functions of Agency costs.

(i) Monitoring Expenses

These outlays give for audits & control procedures that are used to asses and limit the managerial behavior to those actions tends

to be in the best interest of the owners.

(ii)Bonding Expenses

 This approach helps to protect against the potential consequences of dishonest acts by managers. Typically, the owners pay a third party bonding company to obtain a fidelity Bond. This bond (fidelity) is a contract under which the bonding company agrees to reimburse the firm for up to a stated amount if a bonded managers dishonest act results in financial loss to the firm.

(iii) Opportunity costs: Actually this type of costs developed from the difficulties that large organizations typically have in responding to new opportunities. The firms needed organizational construction, choice hierarchy, and organize mechanisms may cause profitable opportunities to be forgone because of managements inability to seize up on them quickly.

(iv)  The most popular, powerful, & expensive agency costs incurred by firms are Structuring Expenses. It includes providing managerial compensation and incentive plans that tend to tie management compensation to share price. The most popular incentive plan is the yielding stock of options to administration. (a) A stock option enables employees to purchase shares of a given class in consideration for a pre-determined amount referred to as the exercise price. The employees profit from a rise in the price of the shares, since the exercise price is pre-determined, but they have not yet paid for the shares. Obviously, options already have an economic value when they are allotted, since they award employees the right to buy shares for a fixed exercise price, but they are not committed to such payment unless they choose to exercise them. Giving way of Stock options to management permit managers to purchase stock at the market price set at the time of the grant. They will be

pleased by being able to resell the shares subsequently at the higher market price if the market price rises.

On the other hand, there are also problems in granting stock options to employees. For instance, a decline in the value of the options due to daily market fluctuations may lower the employees' motivation. In addition, the decision of who will be compensated may cause problems with non-compensated employees (including good middle management). In practice, almost all companies now grant options to all employees in managerial positions, and it is not uncommon to see companies in which all employees, junior and senior, receive options. In addition, some restrictions are imposed by the securities laws on the distribution of securities to employees, and the distribution of options or other securities to employees involves a They are some times criticized because positive management performance can be masked in a poor stock market in which share prices general have declined due to economic and `behavioral market forces outside of management’s control. (b) Performance plans: This type of approach includes the use of routine plan has mature in popularity in recent years due to their relative independence from market forces. A performance appraisal is a process in which a rater or raters evaluate the performance of an employee. More specifically, during a performance appraisal period, rater(s) observe, interact with, and evaluate a person’s performance. Then, when it is time for a performance appraisal, these observations are documented on a form. The rater usually conducts a meeting with the employee to communicate performance feedback. During the meeting, the employee is evaluated with respect to success in achieving last year’s goals, and new goals are set for the next performance appraisal period.

Even though performance appraisals can be quite effective in motivating employees and resolving performance problems, in

reality, only a small number of organizations use the performance appraisal process to its full potential. In many companies, a performance appraisal takes the form of a bureaucratic activity that is mutually despised by employees and managers. The problems a poor appraisal process can create may be so severe that many experts, including the founder of the total quality movement, Edward Deming, have recommended abolishing appraisals altogether.

These plans reimburse managers on the basis of their confirmed performance measured by earning per share and other ratios of return. In addition another form of performance based compensation is cash bonuses where cash payments united to the accomplishment of certain performance goals.

So, by following the above mentioned way we can easily minimize our corporation’s agency problem.

Responsibility of finance manager:

Almost every firm, government agency, and organization has one or more financial managers who oversee the preparation of financial reports, direct investment activities, and implement cash management strategies. As computers are increasingly used to record and organize data, many financial managers are spending more time developing strategies and implementing the long-term goals of their organization.

The duties of financial managers vary with their specific titles, which include controller, treasurer or finance officer, credit manager, cash manager, and risk and insurance manager. Controllers direct the preparation of financial reports that summarize and forecast the organization's financial position, such as income statements, balance sheets, and analyses of future earnings or expenses. Controllers also are in charge of preparing special reports required by regulatory authorities. Often, controllers oversee the accounting, audit, and budget departments. Treasurers and finance officers direct the

organization's financial goals, objectives, and budgets. They oversee the investment of funds and manage associated risks, supervise cash management activities, execute capital-raising strategies to support a firm's expansion, and deal with mergers and acquisitions. Credit managers oversee the firm's issuance of credit. They establish credit-rating criteria, determine credit ceilings, and monitor the collections of past-due accounts. Managers specializing in international finance develop financial and accounting systems for the banking transactions of multinational organizations.

Cash managers monitor and control the flow of cash receipts and disbursements to meet the business and investment needs of the firm. For example, cashflow projections are needed to determine whether loans must be obtained to meet cash requirements or whether surplus cash should be invested in interest-bearing instruments. Risk and insurance managers oversee programs to minimize risks and losses that might arise from financial transactions and business operations undertaken by the institution. They also manage the organization's insurance budget.

Financial institutions, such as commercial banks, savings and loan associations, credit unions, and mortgage and finance companies, employ additional financial managers who oversee various functions, such as lending, trusts, mortgages, and investments, or programs, including sales, operations, or electronic financial services. These managers may be required to solicit business, authorize loans, and direct the investment of funds, always adhering to Federal and State laws and regulations.

Branch managers of financial institutions administer and manage all of the functions of a branch office, which may include hiring personnel, approving loans and lines of credit, establishing a rapport with the community to attract business, and assisting customers with account problems. Financial

managers who work for financial institutions must keep abreast of the rapidly growing array of financial services and products.

In addition to the general duties described above, all financial managers perform tasks unique to their organization or industry. For example, government financial managers must be experts on the government appropriations and budgeting processes, whereas healthcare financial managers must be knowledgeable about issues surrounding healthcare financing. Moreover, financial managers must be aware of special tax laws and regulations that affect their industry.

Financial managers play an increasingly important role in mergers and consolidations, and in global expansion and related financing. These areas require extensive, specialized knowledge on the part of the financial manager to reduce risks and maximize profit. Financial managers increasingly are hired on a temporary basis to advise senior managers on these and other matters. In fact, some small firms contract out all accounting and financial functions to companies that provide these services.

The role of the financial manager, particularly in business, is changing in response to technological advances that have significantly reduced the amount of time it takes to produce financial reports. Financial managers now perform more data analysis and use it to offer senior managers ideas on how to maximize profits. They often work on teams, acting as business advisors to top management. Financial managers need to keep abreast of the latest computer technology in order to increase the efficiency of their firm's financial operations

In the second chapter we have learned about the capital structure.

Capital structure is the ratio of using equity and debt in the organization. When a company use more debt in Capital structure then the risk will be higher.

The Board of Directors or the financial manager of a company should always endeavor to develop a capital structure that would lie beneficial to the equity shareholders in particular and to the other groups such as employees, customers, creditors, society in general. While developing an appropriate capital structure for its company the financial manager should aim at maximizing the long-term market price per share. This can be done only when all these factors which are relevant to the company’s capital structure decisions are properly analyzed and balanced.

In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. For example, a firm that sells $20 billion in equity and $80 billion in debt is said to be 20% equity-financed and 80% debt-financed. The firm's ratio of debt to total financing, 80% in this example, is referred to as the firm's leverage. In reality, capital structure may be highly complex and include dozens of sources. Gearing Ratio is the proportion of the capital employed of the firm which come from outside of the business finance, e.g. by taking a short term loan etc.

Capital structure suitable for the new firm :In case newly introduced firm , it is always recommended that the firm should finance its fund from only equity capital. Contrary to widely held beliefs that startup companies rely heavily on funding from family and friends, a Kauffman Foundation research paper released today reported that external debt financing such as bank loans are the more common sources of funding for many companies during their first year of operation. According to the study, nearly 75 percent of most firms' startup capital is made up in equal parts of owner equity and bank loans and/or credit card debt, underscoring the importance of liquid credit markets to the formation and success of new firms.

Capital structure suitable for the growing firm :

In case growing firm , it is always recommended that the firm should finance its fund from both equity capital and debt capital keeping in mind that the portion of debt capital obviously less than maturing firm. Situation will determine about how much debt and equity capital are required to finance for that type of firm.

Capital structure suitable for the mature firm :In case of mature firm , it is always recommended that the firm should finance its fund from both equity capital and debt capital. In that case, the portion of debt capital is the highest than that of growing and newly introduced firm. In general we should remember that optimum capital structure (where weighted average cost of capital is the lowest) is always suitable for firm.If the firm’s business risk is higher, and at the same time financial risk is lower it is suggested that the firm should use more equity capital and small portion of debt capital. On the other hand if the firm’s business risk is lower, and at the same time financial risk is higher it is recommended that the firm should use more debt capital and small portion of equity capital. For example in case of Petro-Bangla, business risk is higher, and at the same time financial risk is lower. So it is suggested that the firm should use more equity capital and small portion of debt capital. Again if we consider in case of TNT, here we see that the firm’s business risk is lower, and at the same time financial risk is higher. That’ it is recommended that the firm should use more debt capital and small portion of equity capital. Similarly if the firm’s tax position is higher the firm is more likely suitable to use more debt since interest on debt is tax deductable item. On the other hand if the firm is low tax bracket, the firm need to use low debt capital in order to minimize the risk. Apart from this financial flexibility is another factor that also affect the capital structure decisions.Where interest rate is higher like developing countries(for example Bangladesh) it is said that there is less financial flexibililty exists in that countries. It

happens because of higher demand in compare to the lower supply. On the contrary, where is less interest rate like developed countries(for example Japan) it is said that there is more or high financial flexibility exists in that countries. It is just as a result of lower demand in comparison to the total supply. In addition managerial attitude is another one of the important factors that determine capital structure decisions. If the managers are aggressive in nature they are more likely to take debt capital. But if the managers are conservative in nature they are less likely to finance their firm’s capital from debt capital.

The various factors affecting the capital structure decision are

Management Attitudes: Management’s attitude concerning control of enterprise and risk, involved determine the debt or equity in the capital structure and any analysis of capital structure planning can hardly afford to ignore this factor. In fact every addition of equity unit in the capital structure presents management to participate in the company affairs to that extent. Therefore, while planning capital structure, firms may prefer debt to be assumed of continued control.

Cash flow ability of the company: When considering the appropriate capital structure it is extremely important to analyze the cash flow ability of the firm to serve fixed commitment charges. The fixed commitment charges include payment of interest on debentures and other debts, preference dividend and principal amount. Thus the fixed charged depend upon both the amount of senior securities and the terms of payment. The amount of fixed charges will be high if the company employs a large amount of debt or preference capital with short-term maturity. It is therefore, prudent that for servicing fixed charges at proper time, the management must ensure the availability .of cash because inability on the part of management may result in financial insolvency. Therefore, cash flow analysis is essential to consider while planning appropriate capital structure.

Obviously, the greater and more stable the expected future cash flows of the firm, the greater the debt capacity and vice-versa. To be on a safe side the cash flow ability must be determined in the period of depression very carefully. Assets Structure: Composition and liquidity of assets may also influence the capital structure decision of the firm. Firms with long lived fixed assets, especially when demand for their output is relatively assured utilities for example – use long-term debt extensively similarly greater the liquidity the more debt that generally can be used all other factors remaining constant. The less liquid the assets of firm the less flexible the firm can be in meeting its fixed charged obligations

Leverage or Trading on equity: Trading on equity or leverage refers to the financial process. This enables the owners of a company to enhance their return on equity by borrowing funds for one rate of interest, and using the money to earn a higher rate of return, keeping the different for themselves. It is thus, called making money by using other people’s money. Some of the main conclusions regarding the leverage in the capital structure such as use of fixed cost or fixed return sources of finances may be reemphasized. Debts and pre share capital results’ into magnifying the earnings per share (EPS) prevailed the firm earns more on the assets purchased with these funds than the cost of their use. Earnings before interest and taxes (EBIT) and EPS relationship are the means to examine the effect of leverage. Out of per share capital and debt,’ the leverage impact is felt more in the case of debt because their source of finance costs lower, than per share capital and also the interest payable on, debt is, tax deductible. The use of fixed cost sources of finances also adds to the financial risk of the company and, therefore, it should not be used beyond a point where the amount of fixed commitment charges equals the level of EBIT. To give, up because of its effect on EPS financial leverage is one the important consideration in planning the capital structure for the company.

Then we learned the topic on “Working capital”.

Working capital is that part of company’s capital which is used for purchasing raw material and involve in sundry debtors. We all know that current assets are very important for proper working of fixed assets. Suppose, if you have invested your money to purchase machines of company and if you have not any more money to buy raw material, then your machinery will no use for any production without raw material. From this example, you can understand that working capital is very useful for operating any business organization. We can also take one more liquid item of current assets that is cash. If you have not cash in hand, then you can not pay for different expenses of company, and at that time, your many business works may delay for not paying certain expenses. If we define working capital in very simple form, then we can say that working capital is the excess of current assets over current liabilities. Working Capital is the money used to make goods and attract sales. The less Working Capital used to attract sales, the higher is likely to be the return on investment. Working Capital management is about the commercial and financial aspects of Inventory, credit, purchasing, marketing, and royalty and investment policy. The higher the profit margin, the lower is likely to be the level of Working Capital tied up in creating and selling titles. The faster that we create and sell the books the higher is likely to be the return on investment. Thus when we have been using the word investment in the chapter on pricing, we have been discussing Working Capital.

After that we had learned the concept on “Current Assets investment policy”.

Optimal investment in current asset is part of the working capital management policy within an organization. An effective working capital management requires right amount of investment in current assets and appropriate level of short-term financing. Excessive investment in current assets means lack of funds to invest elsewhere which shall effect the liquidity aspect

of the company, while too little investment means inability to service the growing demand for the goods which will erode the profitability of the company.

Therefore, it is a matter or finding that equilibrium or optimal level of investment in current asset and a right mix of financing (either short-term or long-term) to support the investment. Company's decision of selecting a short-term investment policy must be based upon maximizing the firm value in the long run while keeping a balance between the profitability and liquidity goals of the company.

Growth companies should focus on keeping stock of inventory to service the predicted growth in demand as well as to compete with the local wholesalers. Although the investment in asset will not provide better return as compared to long-term investment options, however, the opportunity cost of a sale foregone due to unavailability of stock can keep the company out of business forever. Hence finding the right level of investment requires a trade-off between minimizing cost without hindering the liquidity of business.

Company might select an aggressive short-term financing policy whereby it will fund both its temporary and permanent current assets with the help of short-term finance, if the demand of goods fluctuate and access of short-term finance is readily available. Manager's prediction about the movement in short-term interest rate as compared to long-term interest rate will also affect the decision.

However, if a company short-term financing policy were restrictive, it would be better off with a conservative action by funding permanent current asset and part of temporary current assets with long-term finance. By taking this approach, company can lock in the cost of funds and avoid any short-term interest rate fluctuations.

On one hand, companies carrying cost components such as; interest expenses, insurance & taxes, material handling

expenses, damage and obsolescence cost will increase with the increase in inventory investment. On the other hand, its shortage cost components such as; stock out cost, lost contribution due to shortage of supply and customer goodwill foregone will decrease with the increase in investment in inventory you hold.

After that we had studied the most important concept and that is nothing but Cash management.

Cash management consists of taking the necessary actions to maintain adequate levels of cash to meet operational and capital requirements and to obtain the maximum yield on short-term investments of pooled, idle cash.  A good cash management program is a very significant component of the overall financial management of a municipality.  Such a program benefits the city or town by increasing non-tax revenues, improving the control and superintendence of cash, increasing contacts with members of the financial community and lowering borrowing costs, while at the same time maintaining the safety of the municipality’s funds.

Businesses must understand cash management for it to be effective. Financial goals will be harder to achieve without a proven structure. It is possible that goals are not achieved, and it can be seen that cash management may have taken part in it one way or another. It's the fundamental building block of financial planning. There are various methods of short term financing can also be essential to a successful businesses. This paper will describe cash management and short term financing. Some of the points that will be brought up are managing your working capital, managing business risks, and monitoring costs.Working capital is an essential part of cash management. The level of working capital of a business is directly related to the flow of cash into and out of a business. Working capital is needed to setup a business, pay operating costs, and continue to operate until the receivables arrive. Depending on the amount of working capital the business uses, things

Cash can be effected like paying suppliers, buying materials and even salaries. I can be seen that maintaining and managing a particular level of working capital allows the business to flex during hard times. Not understanding and forecasting the need for the correct amount of working capital can be devastating to a business.Short-term financing can be used to make business purchases that can allow the company to purchase fixed assets, or help a company with less than expected working capital. A line of credit can be created with the company's financial institution, and is normally done before the need should arise to be effective. There are many risks involved in running a business, and serious challenges should be expected at some time in the future. It is possible to reduce the risk of possible capital issues by planning ahead and having a more diversified client base. Having the business depend on the heath of another business is not good practice.

Finally manager should take all the step to receive the money quickly and delay in the case of disbursement.

We had also gathered knowledge on the most important concept Common Stock that are frequently used in the field of finance.

Common Stock is a security representing a legal claim to a percentage of a company's earnings and assets. Holders of common Stock have some input into choosing company management, but do not generally have much say in the day to day operations. If the common stock is publicly traded, the company will generally be required to meet regulatory obligations such as filing audited financial reports. Holders of common stock are also offered the chance to participate in an annual meeting, where the company may share its vision for the future. Investors may purchase common stock if they believe a company will be worth more in the future than it is valued at in the present. Common stock does not always pay a dividend. If the company goes bankrupt common stockholders generally lose their entire investment.

The advantages of issuing common stock are Given below:

Common stock has the potential for delivering very large gains, Annual returns-on-investment (ROIs) of over 100% have occurred on a somewhat regular basis.

The potential loss from stock purchased with cash is limited to the total amount of the initial investment. This is considerably better than that of some leveraged transactions, where the maximum loss can well exceed the total of the funds invested.

Stocks offer limited legal liability. Passive stockholders are protected against any liability stemming from the company’s actions beyond their financial investment in the company.

Most stocks are very liquid; in other words, they can be bought and sold quickly at a fair price.

Although past performance is not a guarantee of future performance, stocks have historically offered very high returns in relation to other investments.

Stocks offer two ways for their owners to benefit, by capital gain and with dividends. As previously stated, each share of stock represents partial ownership in a company. If the company becomes more valuable, so will the ownership interest

represented by each share of stock. This appreciation of the stock’s value is known as a capital gain.

Sometime manager take the decision to issue bond in the market for financing. When a company issue bond instead of common stock get some extra benefits.

There are several advantages of issuing bonds or other debt instead of stock when acquiring assets. One advantage is that the

interest on bonds and other debt is deductible on the corporation’s income tax return. Dividends on stock are not deductible on the income tax return.A second advantage of financing asset with bonds instead of stock is that the ownership interest in the corporation will not be diluted by adding more owners. Bondholders and other lenders are not owners of the assets or of the corporation. Therefore, all of the gain in the value of the assets belongs to the stockholders. The bondholders will receive only the agreed upon interest.  This is related to the concept of leverage or trading on equity. By issuing debt, the corporation gets to control a large asset by using other people’s money instead of its own. If the asset ends up being very profitable, all of its earnings minus the interest, will enhance the owners’ financial position

So the decision depends on the manager. He may issue common stock or issue bond to the investor.Inventory management:

Inventory management is primarily about specifying the size and placement of stocked goods. Inventory management is required at different locations within a facility or within multiple locations of a supply network to protect the regular and planned course of production against the random disturbance of running out of materials or goods. The scope of inventory management also concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, returns and defective goods and demand forecasting. Balancing these competing requirements leads to optimal inventory levels, which is an on-going process as the business needs shift and react to the wider environment.

Economic order Quantity:

EOQ is the point where the carring cost and the storing cost will be minimum. Every company wants to make the order in a EOQ point. In this stage company can save their cost.So as a manager all the time should order at EOQ point. In this way company could able to survive in the competition.

The aim of the Economic Order Quantity is to minimize Total Inventory Cost. This occurs where the total holding costs are equal to the costs of ordering. This is logical because there is a trade-off between holding costs and ordering costs. If you have no inventory, your ordering costs would be exponential—your suppliers would charge for delivery each time, bulk discounts would not be available and staff would be very active in receiving regular orders. However, if you maintain too much inventory you would incur significant holding costs. This is because the business might need more staff, equipment and storage space to handle high inventory levels.

Inventory control is important to ensure quality control in businesses that handle transactions revolving around consumer goods. Without proper inventory control, a large retail store may run out of stock on an important item. A good inventory control system will alert the retailer when it is time to reorder. Inventory control is also an important means of automatically tracking large shipments. For example, if a business orders ten pairs of socks for retail resale, but only receives nine pairs, this will be obvious upon inspecting the contents of the package, and error is not likely. On the other hand, say a wholesaler orders 100,000 pairs of socks and 10,000 are missing. Manually counting each pair of socks is likely to result in error. An automated inventory control system helps to minimize the risk of error. In retail stores, an inventory control system also helps track theft of retail merchandise, providing valuable information about store profits and the need for theft-prevention systems.

An inventory control system is a process for managing and locating objects or materials. In common usage, the term may also refer to just the software components. There are three Inventory Control System.

1. Red Line Method : An inventory control procedure where a red line is drawn around the inside of an inventory –stocked bin to indicate the reorder point level.· this procedure works well for many items in retail businesses2. Computerized Inventory Control SystemA system of inventory control in which a computer is used to determine reorder points & to adjust inventory balances.

 3. Just- in –Time : A system of inventory control in which a manufacturer coordinates production with suppliers so that raw materials of components arrive just as they are needed in the production process.

Which one is more suitable for the organization that depends on the nature of the organization. So manager use the system base on condition.

A financial planner or personal financial planner is a practicing professional who helps people deal with various personal financial issues through proper planning, which includes but is not limited to these major areas: cash flow management, education planning, retirement planning, investment planning, risk management and insurance planning, tax planning, estate planning and business succession planning (for business owners).

The work engaged in by this professional is commonly known as personal financial planning. In carrying out the planning function, he is guided by the financial planning process to create a financial plan; a detailed strategy tailored to a client's specific situation, for meeting a client's specific goals. The key

defining aspect of what the financial planner does is that he considers all questions, information and advice as it impacts and is impacted by the entire financial and life situation of the client.

Financial Control is a key form of state control. Financial control focuses on monetary values rather than physical units. In capitalist countries, financial control is a limited, bureaucratic process concerned primarily with the use of budgetary funds and the financial activities of ministries, departments, and state-run enterprises and institutions. Despite its appearance of strict legality, financial control is an instrument for protecting the interests of the bourgeoisie.

In socialist countries, financial control is the control by the state over public finances in the production and distribution of the social product and national income. Financial control is designed to improve the quantitative and qualitative performance indicators of enterprises, associations, ministries, and departments. The primary task of financial control is to monitor the formation and use of centralized and decentralized monetary resources. Financial control is used to facilitate the fulfillment of national economic and financial plans, preserve socialist property, ensure that material, labor, financial, and natural resources are used rationally and efficiently, and reduce losses and nonproductive expenditures. It also helps to reduce mismanagement and wastefulness and to identify reserves for increasing the efficiency of social production. One of the most important tasks of financial control is to see that all legislation on financial questions is carefully followed and that all financial commitments to the state budget, to banks, and to other enterprises and organizations are promptly and fully met.

The breakeven point in economics is the point at which cost or expenses and income are equal - there is no net loss or gain, one has "broken even".

The point at which a firm or other economic entity breaks even is equal to its fixed costs divided by its contribution to profit per

unit of output, which can be shown by the following formula: -

Breakeven point in units=Fixed cost/Contribution margin per unit

Breakeven point in values=Fixed costs/P/V ratio

We all know that the Breakeven Point in a business is when it's not making a profit or losing money. Sounds simple, right? Well, can you tell me what your exact Breakeven Point is? Probably not. Most business owners either don't know it or think they know it, with neither exactly knowing. Breakeven can be expressed as a Dollar amount or Unit Sales, and once determined, you have a Target to reach through a carefully thought out Business Plan. Without an established Breakeven Target, your Strategic Plan is floundering.

It is very important to understand that increased Sales do not always translate into increased Profits. Many companies have gone out of business by ignoring the importance of Breakeven Analysis, thinking increased Sales will lead to certain Profitability. Unfortunately, more often than not, the company's Variable Costs, or those directly derived from sales levels, get exponentially larger as Sales Volume Grows. Not knowing the Variable Costs is a silent killer for many companies.

When calculating the Breakeven Point, a person will have to make certain assumptions and estimates. Error on the side of conservative numbers by using more pessimistic sales and margin thresholds, while overstating your projected costs. You want the Breakeven Point to be in the safe zone - a worst case threshold. I will present some Breakeven formulas which err on the simple side, you can get very complicated with different Breakeven Formula variations. The point I am making here is providing some simple formulas you can quickly calculate your Breakeven and understand where you are presently and what it looks like projected. Once you have a handle on that, then

maybe more sophisticated Breakeven Analysis is warranted and advantageous

Breakeven Analysis is an excellent process to determine the effect of different unit costs for expected sales for each unit type. Understanding which your most profitable units are, and how they relate to Breakeven and Profit Goals is the heart of your Marketing Strategy and Strategic and Sales Plan.

In business terminology a high degree of operating leverage, other things held constant, means that a relatively small change in sales will result in a large change in operating income .So it should be recommended that the lower the operating leverage the more better result will come.

Financial leverage considers the impact changing operating income has on earnings per share , or earnings available to common stockholders.

Operating Leverage affects the operating section of the income statement , whereas financial leverage affects the financing section of the income statement.

The three important concepts DOL, DFL and DTL are very much important for any business organizations in order to measure their performance.

From my point of view, it is better for all of these three terms to become lower. Because as lower the value, the more these are better.

Conclusion :

At last I want to say that we the students of regular MBA course really learned lot of valuable things in our intermediate financial management course. Knowledge of these financial concepts will certainly bring benefits for our future professional life.