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Unsystematic Risk. also known as “diversifiable risk,” as it can be managed and controlled, unlike “systematic risk.” which is difficult to manage and control as it is widespread and covers the entire system. The unsystematic risk may be specific to an industry or company and is caused by one or more of the following: 1) … Read more
Systematic Risk. There are a number of risks a business organization is exposed to, like ‘Market Risk’, ‘Interest Rate Risk’, ‘Country Risk’, ‘Business Risk’, ‘Financial Risk’, etc. They can be put under two broad categories: Systematic Risk The risk, which is inherent to the entire market or system, is termed a ‘Systematic Risk’ or ‘Uncontrollable … Read more
Types and classifications of cost. The cost may be classified as follows: 1) Future cost versus historical cost: Future costs are the basis on which financial decisions are taken. although they are only projections of what may or may not happen in the future, they are more important as compared to the historical cost, which … Read more
Modigliani and Miller (MM) Model. The genesis of the Dividend Irrelevance Theory of Modigliani and Miller may be traced back to the “Capital Irrelevance Model’ advocated by them in a paper published in 1958. Under the above model, a was held that the capital structure of a company has no relevance as far as its … Read more
Operating & Cash Conversion Cycle. The time taken for the completion of the cycle of the processes of conversion of raw material into finished goods, sale of goods, the realization of sale proceeds, and receipt of cash is termed the ‘Operating and Cash Conversion Cycle’ or ‘Working Capital Cycle.” The operating cycle of a company … Read more
The level of working capital requirements of a company is determined by the following factors 1) Nature of Business: The nature of a company’s business is the prime determinant of its working capital requirements. Businesses of small size, especially those engaged in trading of goods, need a high level of working capital to fulfill their … Read more
Motives for Holding Cash. One of the most important constituents of current assets is “cash.” It is required to carry out all the activities of the business. A business should have enough cash on hand to pay its bills right now and in the future. Cash, being totally unproductive by nature, should be kept at … Read more
Factors Affecting the Level of Cash. There are a number of things that affect how much cash is needed, such as: 1) Credit Position of the Firm: The cash balance depends upon the credit position in the following two ways: i) If a firm’s credit position is strong, only a reasonable amount of cash balances … Read more
Investing Surplus Cash. Surplus cash that is not required in the short run should be invested in liquid assets, Le.. marketable securities, or other securities that can be instantly converted into cash when required. Cash itself is an unproductive asset, and keeping it in the same form will not benefit the firm. Rather, it has … Read more
Controlling cash outflows. Just as the basic rule for increasing cash inflows is to increase collection speed, the basic rule for decreasing cash outflows is to slow down the payment process. For this, a centralized payment system may be adopted, just as a decentralized collection system was adopted in the case of receivables. A reasonable … Read more