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what is bond duration | bond duration measures the change in a bond s price when interest rates fluctuate if the duration is high the bond s price will move in the opposite direction to a greater degree than the change in interest rates conversely when this figure is low the debt instrument will show less movement to the change in interest rates the bottom lineconvexity is a measure of the curvature of its duration or the relationship between bond prices and yields it describes how the duration of a bond changes in response to changes in interest rates convexity can impact the value of investments several factors impact the convexity of a bond including the bond s coupon rate maturity and credit quality bond investors can use convexity to their advantage by managing their bond portfolios to take advantage of changes in interest rates correction jan 23 2024 the article was amended to clarify that the higher the convexity the more the bond price will increase when rates fall and the less the bond price will drop when rates rise | |
what is cook the books | cook the books is a slang term for using accounting tricks to make a company s financial results look better than they really are typically cooking the books involves manipulating financial data to inflate a company s revenue and deflate its expenses in order to pump up its earnings or profit understanding cook the bookscompanies can manipulate their financial records to improve their financial results using a multitude of tactics some companies don t record all of their expenses that incurred in a period until the next period by recording a portion of q1 s expenses in q2 for example a company s q1 earnings or profit will look more favorable many companies who sell their product extend terms to their customers which allows them to pay the company at a later date these sales are recorded as accounts receivables ar since they represent product that s been sold and shipped but the customers have yet to pay the terms can be 30 60 90 days or more companies can falsify their ar by claiming that they made a sale and record the accounts receivable on the balance sheet if the fake receivable is due in 90 days the company can create another fake receivable 90 days from now to show that current assets remain stable only when a company falls behind collecting its receivables will it show that there s a problem unfortunately banks often lend in part based on the value of a company s accounts receivables and can fall victim to lending off false receivables during a detailed audit the bank auditors would match the ar invoices to customer payments into the company s bank accounts which would show any amounts not being collected during the first years of the new millennium several large fortune 500 companies such as enron and worldcom were found to have used sophisticated accounting tricks to overstate their profitability in other words they cooked the books once these massive frauds came to light the ensuing scandals gave investors and regulators a stark lesson in how clever some companies had become at hiding the truth between the lines of their financial statements even though the sarbanes oxley act of 2002 reined in many dubious accounting practices companies that are inclined to cook their books still have plenty of ways to do so regulations against cooking the booksto help restore investor confidence congress passed the sarbanes oxley act of 2002 among other things it required that the senior officers of corporations certify in writing that their company s financial statements comply with sec disclosure requirements and fairly present in all material aspects the operations and financial condition of the issuer 1 the u s securities and exchange commission sec helps to maintain a fair and orderly financial market which includes various financial reporting requirements for publicly traded companies 2 executives who knowingly sign off on false financial statements may face criminal penalties including prison sentences but even with sarbanes oxley in effect there are still numerous ways that companies can cook the books if they re determined to do so as the following examples illustrate examples of cooking the bookscheck out these manifestations of accounting creativity companies can use credit sales to exaggerate their revenue that s because the purchases customers make on credit can be booked as sales even if the company allows the customer to postpone payments for six months in addition to offering in house financing companies can extend credit terms on current financing programs so a 20 jump in sales could simply be due to a new financing program with easier terms rather than a real increase in customer purchases these sales end up being reported as net income or profit long before the company has actually seen that income if it ever will manufacturers engaged in channel stuffing ship unordered products to their distributors at the end of the quarter these transactions are recorded as sales even though the company fully expects the distributors to send the products back the proper procedure is for manufacturers to book products sent to distributors as inventory until the distributors record their sales many companies have nonrecurring expenses one time costs that are considered extraordinary events and unlikely to happen again companies can legitimately classify those expenses as such on their financial statements however some companies take advantage of this practice to report expenses that they routinely incur as nonrecurring which makes their bottom line and future prospects look better than they are in reality stock buybacks can be a logical move for companies with excess cash especially if their stock is trading at a low valuation a buyback is when a company uses its cash to purchase a portion of the company s outstanding equity shares buybacks reduce the overall share count and typically lead to a higher stock price however some companies buy back stock for a different reason to disguise a decline in earnings per share eps and they often borrow money to do so by decreasing the number of shares outstanding they can increase earnings per share even if the company s net income has declined since company executives forecast their earnings per share for each upcoming quarter beating that forecast can help create a positive image for the company and lead to a jump in the stock price share buybacks as a method to boost eps have been a controversial topic for many years unfortunately some companies abuse the metric by repurchasing shares to show that eps has grown and exceeded their quarterly eps forecast despite earning little to no additional profit | |
what is copyright | copyright refers to the legal right of the owner of intellectual property in simpler terms copyright is the right to copy this means that the original creators of products and anyone they give authorization to are the only ones with the exclusive right to reproduce the work copyright law gives creators of original material the exclusive right to further use and duplicate that material for a given amount of time once a copyright expires the copyrighted item becomes public domain | |
when someone creates a product that is viewed as original and required significant mental activity to create this product becomes an intellectual property that must be protected from unauthorized duplication examples of unique creations include | one safeguard that can be used to legally protect an original creation is copyright under copyright law a work is considered original if the author created it from independent thinking void of duplication this type of work is known as an original work of authorship owa anyone with an original work of authorship automatically has the copyright to that work preventing anyone else from using or replicating it the copyright can be registered voluntarily by the original owner if they would like to get an upper hand in the legal system if the need arises the copyright to your original work belongs to you even if you don t register it with the government however you will need a registered copyright if you are bringing legal action for infringement not all types of work can be copyrighted a copyright does not protect ideas discoveries concepts or theories brand names logos slogans domain names and titles also cannot be protected under copyright law for an original work to be copyrighted it has to be in tangible form this means that any speech discoveries musical scores or ideas have to be written down in physical form in order to be protected by copyright in the united states original owners are protected by copyright laws all of their lives until 70 years after their death if the original author of the copyrighted material is a corporation the copyright protection period is 95 years from the date of publication or 120 years whichever expires first u s copyright law has experienced a number of amendments and changes that have altered the duration of copyright protection the life of the author plus 70 years protection can be attributed to the 1998 copyright term extension act also known as the mickey mouse protection act or sonny bono act which generally increased copyright protections by 20 years copyright protection varies from country to country and can stand for 50 to 100 years after the individual s death depending on the country copyright vs trademarks and patentswhile copyright law is not all encompassing other laws such as patent and trademark laws may impose additional sanctions although copyrights trademarks and patents are frequently used interchangeably they offer different forms of protection for intellectual property trademark laws protect material that is used to distinguish an individual s or corporation s work from another entity these materials include words phrases or symbols such as logos slogans and brand names that copyright laws do not cover patents cover inventions for a limited period of time patented materials include products such as industrial processes machines and chemical positions | |
what is the difference between copyright and trademark | a copyright protects a creator s original work from being used or duplicated without their permission a trademark protects the reputation of a business that is associated with identifying material such as its logo or slogan both are ways of protecting intellectual property | |
do i need to register a copyright for my website | copyright exists as a right from the moment of creation you do not need to register your original work such as content on your website for it to be your intellectual property however registering a copyright provides more legal protection if you plan to bring a lawsuit against someone for infringing on your work you will need to have a registered copyright | |
how much does it cost to register a u s copyright | the cost of registering a copyright varies depending on what you are copyrighting and whether you are filing online or by paper in the united states the cost of copyright registration ranges from 45 to 500 the bottom linecopyright law is designed to protect the creators of original material their copyrighted work cannot be used or duplicated without their permission in the united states copyright usually lasts for 70 years after the creator s death for work to be protected under copyright law it must be tangible as well as original other forms of legal protection for intellectual property also exist such as trademarks and patents | |
what are core competencies | core competencies are the resources and capabilities that comprise the strategic advantages of a business a modern management theory argues that a business must define cultivate and exploit its core competencies in order to succeed against the competition understanding core competenciesa successful business has identified what it can do better than anyone else and why its core competencies are the why core competencies are also known as core capabilities or distinctive competencies core competencies lead to competitive advantages core competency is a relatively new management theory that originated in a 1990 harvard business review article the core competence of the corporation 1 in the article c k prahalad and gary hamel review three conditions a business activity must meet in order to be a core competency the article pointed out the contrast of how businesses operated in the 1980s versus how they should operate in the 1990s the article asserted that in the 80s business managers were judged on their ability to restructure declutter and delayer their corporations in the 1990s they ll be judged on their ability to identify cultivate and exploit the core competencies that make growth possible 1the core competencies that distinguish a business vary by industry a hospital or clinic may focus on excellence in particular specializations while a manufacturer may identify superior quality control core competencies in businessa business can choose to be operationally excellent in a number of different ways below are common core competencies found in business core competencies in individualsa variation of the principle that has emerged in recent years to pivot towards individuals looking for a new job the variation recommends that job seekers focus on their personal core competencies in order to stand out from the crowd these positive characteristics may be developed and listed on a resume some personal core competencies include analytical abilities creative thinking and problem resolution skills the notional of individual or personal core competencies gives an individual a platform during interviews i e a candidate can identify themselves as the most experienced most creative or most technically sound candidate the core competencies an individual lists on their resume should be tailored to suit the job and demonstrate actual highly proficient skills necessary for the role | |
how to identify core competencies | some core competencies develop naturally while other core competencies must be consciously and strategically formed over time whether a company is yet for form or has existed for a while here are ways for organizations to identify what their core competencies are or could be review the company s mission statement value statement or slogan if a company has invested time and effort into developing a brand chances are it has already put some effort into considering what it wants to be known for a company s mission statement value statement or other branded content may identify what the company wants to be or how it wants to seen by customers compare the company to its competitors a core competency is a unique element that can not be easily replicated by other companies therefore a company can identify its core competencies by thinking through how the company is different from other businesses this includes differences in products processes market areas delivery customs pricing or employee base interview internal staff or major customers different key stakeholders of a company may have insights into its strengths or weaknesses of a company in some cases the day to day staff may have a better sense of what the company excels in in addition primary customers that have the most real world experience with the company s products or services may yield feedback as well brainstorm what benefits the company provides customers core competencies often relate back to the product or service the company provides for example is the product the lowest cost most user friendly or highest quality if customers gain a benefit from the company s goods i e they pay the lowest prices that can often be leveraged into a core competency understand the processes required to make goods in addition to considering the specific products a company should review what it takes to make the products this includes the labor materials knowledge processes equipment or research that must be refined in advance identify unique aspects of the company if all else fails it may be simplest to just consider what about the company is unique this may relate to the company s history certain benefits it can give its employees the industry it resides in or what it aims to achieve in the world consider hiring an external consultant to evaluate your company s framework to determine what your core competencies are or could be | |
why core competencies are important | core competencies allow a company to better understand how to allocate its resources for example it may make sense for a company to outsource certain tasks if it does not care to develop those tasks into company strengths this also includes stronger direction on the staff to hire and what training to incur core competencies also reduce a company s market risk by being exceptional or proficient in specific areas a company can rely on these areas to maintain consistency and reliability in operations for example companies with strong internal cultures will experience less employee turnover training expenses product deficiencies due to lack of knowledge or unhappy workers as companies determine what they are best at customers may often recognize and associate the company with that core competency therefore core competencies help a company develop a stronger brand image or market presence for example many consumers associate apple products with being the most cutting edge and innovative last core competencies may help create stronger relationships between a company and its employees or customers both employees and customers may associate with a company better knowing its strength or identity in the example above employees may take pride in creating the most innovative products while customers gain satisfaction knowing they possess the most creative solutions some core competencies do expire consider sears long term dominance as the major retailor due to their catalog now that core competency has faded and an in home printed catalog may no longer be viewed as a strength 2advantages and disadvantages of core competenciescore competencies are difficult to imitate it often takes a long period of time or large sums of capital to develop core competencies once a company has achieved a core competency it often has a major advantage over its competitors in the marketplace core competencies may also be transferrable across different industries or product lines for example with a platform of being an incredibly innovative company apple has expanded into new product lines different sectors and varying geographical regions an advantage of a company may be able to be applied widely last core competencies naturally enhance the marketability of a product spirit airlines core competency of offering the cheapest flights on average is not only its strength it doubles as a company slogan though this may mean some consumers are naturally adverse to the company it also means spirit s brand image is clearly defined and recognizable just as difficult as a core competency is to create it may be equally as difficult to change this may inadvertently cause the company s brand image to falter and be confusing for example mcdonald s was once known for indoor playgrounds and ronald mcdonald though the company has shifted away from this culture long time consumers may still associate the brand with old core competencies core competencies also naturally limit the flexibility of a company consider a low price retailer such as wal mart the company may struggle to launch high end more expensive product lines with greater margins because consumers may not appropriately associate the product with the company a company may also lose the forest among the trees if it gives too much attention to developing a core competency the ultimate goal of a company is not to possess core competencies its purpose is to generate revenue through the sale of products therefore companies may spend tremendous amounts of time or capital without an overarching strategy that makes sense | |
is often difficult for competitors to overcome once a core competency has been achieved | may be able to be translated to different products sectors or business opportunitiesenhances the company s brand image and may make marketing endeavors more easily understoodmay result in a company being tied to an outdated no longer used core competencymay reduce the overall flexibility of a companymay require large time or capital requirementsmay result in a company focusing too heavily on core competencies instead of a single cohesive strategyreal world example of core competenciespart 1 of amazon s 2021 annual report discusses the nature of the company s business 3 the company strives to be earth s most customer centric company as much it discusses the following business activities | |
what are the main types of core competencies | core competencies in business often relate to the type of product delivered to a customer or how that product is delivered for instance the main types of core competencies include having the lowest prices best reliable delivery best customer service friendliest return policy or superior product | |
how does a company develop core competencies | a company should internally assess what it does best and it should also assess how its competition approaches the market then a company should evaluate where it feels it has the best chance to be industry leader though these areas may not currently be a company s strength it can make capital investments and process changes to develop core competencies over time | |
what is the best type of core competency | one type of core competency is not necessary better than the rest however some core competencies may be more difficult for other companies to overcome for example consider the coca cola brand the company s core competency of brand recognition may be very difficult for a new beverage company to overtake however coca cola s approach to customer service or company culture may be easier for a competing company to overtake | |
why do core competencies matter | core competencies lead to operational excellence which leads to superior products happier customers and or greater profitability when a company is able to doing part of the sale process exceptionally well it gains a positive reputation for its core competence this reputation may lead to stronger sales happier employees and better business operations the bottom linecore competencies are the advantages that one company has over its competitors it s the areas of business that the company excels at and it s often what the company is known for ranging from yielding the highest quality products to having the best customer service to being the low cost provider core competencies define a company s identity and guide its operational strategy | |
what are corporate bonds | corporate bonds are debt securities issued by a corporation in order to raise money to grow the business pay bills make capital improvements make acquisitions and for other business needs bonds are sold to investors and the company gets the capital it needs and in return the investor is paid a pre established number of interest payments at either a fixed or variable interest rate when the bond expires or reaches maturity the payments cease and the original investment is returned the backing for the bond is generally the ability of the company to repay which depends on its prospects for future revenues and profitability in some cases the company s physical assets may be used as collateral understanding corporate bondsin the investment hierarchy high quality corporate bonds are considered a relatively safe and conservative investment investors building balanced portfolios often add bonds in order to offset riskier investments such as growth stocks over a lifetime these investors tend to add more bonds and fewer risky investments in order to safeguard their accumulated capital retirees often invest a larger portion of their assets in bonds in order to establish a reliable income supplement in general corporate bonds are considered to have a higher risk than u s government bonds as a result interest rates are almost always higher on corporate bonds even for companies with top flight credit quality the difference between the yields on highly rated corporate bonds and u s treasuries is called the credit spread corporate bond ratingsbefore being issued to investors bonds are reviewed for the creditworthiness of the issuer by one or more of three u s rating agencies standard poor s global ratings moody s investor services and fitch ratings 123each has its own ranking system but the highest rated bonds are commonly referred to as triple a rated bonds the lowest rated corporate bonds are called high yield bonds due to the greater interest rate applied to compensate for their higher risk these are also known as junk bonds bond ratings are vital to alerting investors to the quality and stability of the bond in question these ratings consequently greatly influence interest rates investment appetite and bond pricing companies with solvency problems those trying to avoid bankruptcy and those in reorganization might also offer income bonds usually at an above average rate income bonds can raise money for the struggling company and are not required to pay coupons or dividend payments | |
how corporate bonds are sold | corporate bonds are issued in blocks of 1 000 in face or par value almost all have a standard coupon payment structure typically a corporate issuer will enlist the help of an investment bank to underwrite and market the bond offering to investors the investor receives regular interest payments from the issuer until the bond matures at that point the investor reclaims the face value of the bond the bonds may have a fixed interest rate or a rate that floats according to the movements of a particular economic indicator corporate bonds sometimes have call provisions to allow for early prepayment if prevailing interest rates change so dramatically that the company deems it can do better by issuing a new bond investors may also opt to sell bonds before they mature if a bond is sold the owner gets less than face value the amount it is worth is determined primarily by the number of payments that still are due before the bond matures investors may also gain access to corporate bonds by investing in any number of bond focused mutual funds or etfs | |
why corporations sell bonds | corporate bonds are a form of debt financing they are a major source of capital for many businesses along with equity bank loans and lines of credit they often are issued to provide the ready cash for a particular project the company wants to undertake debt financing is sometimes preferable to issuing stock equity financing because it is typically cheaper for the borrowing firm and does not entail giving up any ownership stake or control in the company generally speaking a company needs to have consistent earnings potential to be able to offer debt securities to the public at a favorable coupon rate if a company s perceived credit quality is higher it can issue more debt at lower rates | |
when a corporation needs a very short term capital boost it may sell commercial paper which is similar to a bond but typically matures in 270 days or less | a balanced portfolio may contain some bonds to offset riskier investments the percentage devoted to bonds may grow as the investor approaches retirement corporate bonds vs stocksan investor who buys a corporate bond is lending money to the company an investor who buys stock is buying an ownership share of the company the value of a stock rises and falls and the investor s stake rises or falls with it the investor may make money by selling the stock when it reaches a higher price by collecting dividends paid by the company or both by investing in bonds an investor is paid in interest rather than profits the original investment can only be at risk if the company collapses one important difference is that even a bankrupt company must pay its bondholders and other creditors first stock owners may be reimbursed for their losses only after all of those debts are paid in full companies may also issue convertible bonds which are able to be turned into shares of the company if certain conditions are met | |
are corporate bonds better than treasury bonds | whether corporate bonds are better than treasury bonds will depend on the investor s financial profile and risk tolerance corporate bonds tend to pay higher interest rates because they carry more risk than government bonds corporations may be more likely to default than the u s government hence the higher risk companies that have low risk profiles will have bonds with lower rates than companies with higher risk profiles | |
do corporate bonds pay monthly | most corporate bonds pay semi annually every six months however bonds can pay monthly quarterly or annually | |
are corporate bonds fdic insured | no corporate bonds are not fdic insured they are an investment security rather than a deposit of your funds hence they are not fdic insured like your checking account is the bottom linecompanies need money to run their businesses even if they generate enough money through their core operations it can be financially prudent to raise outside money companies generally have two options of doing this equity financing and debt financing equity financing is the issuance of stocks and debt financing includes the issuance of bonds corporate bonds allow companies to raise capital without giving up ownership and to operate more freely | |
what is a corporate charter | a corporate charter also known as a charter or articles of incorporation is a written document filed with the secretary of state or registrar in canada by the founders of a corporation it details the major components of a company such as its objectives structure and planned operations if approved by the state the company becomes a legal corporation understanding corporate chartersthe creation of corporate charters is the start to building a new corporation corporate charters signal the birth of a new corporation once filed and approved a corporation becomes legitimate and legal the document must be created and filed before the company can transact as a corporation if the corporate charter is not created before the business starts the owners expose themselves to risk including being personally liable for all the possible damages and debts created by the business during the period that the corporation transacted business without a legitimate corporate charter a corporate charter is a document establishing a company as a corporation in the us or canada and detailing its governance structure operations and more requirements of corporate chartersat the most basic level the corporate charter includes the corporation s name its purpose whether the corporation is a for profit or nonprofit institution the location of the corporation the number of shares that are authorized to be issued and the names of the parties involved in the formation corporate charters are filed with the state secretary in which the corporation is located typically the state in which the company is located charges a filing fee to process the corporate charter some government websites provide templates for corporate charters however some businesses opt to consult and hire business lawyers when creating and filing corporate charters to provide more legitimate and favorable legal business documents and environments the state in which the corporation is headquartered has specific requirements pertaining to the parts of the corporate charter depending on the type of corporation some states require the inclusion of inc or incorporated the charter also includes the name of the authorized agent no matter the location a corporation must have a designated registered agent who serves as the authorized receiver of important legal documents for the corporation corporations must provide the reasons why they were formed this statement includes what the corporation does their industry and what type of products and services they provide aside from providing a designated registered agent the corporate charter must also include the names and addresses of the founders corporate officers and initial directors also corporations that are designated as stock corporations must provide the number of stock shares the company has the authority to issue and the par value per share | |
what is corporate citizenship | corporate citizenship involves the social responsibility of businesses and the extent to which they meet legal ethical and economic responsibilities as established by shareholders corporate citizenship is growing increasingly important as both individual and institutional investors begin to seek out companies that have socially responsible orientations such as their environmental social and governance esg practices understanding corporate citizenshipcorporate citizenship refers to a company s responsibilities toward society the goal is to produce higher standards of living and quality of life for the communities that surround them and still maintain profitability for stakeholders the demand for socially responsible corporations continues to grow encouraging investors consumers and employees to use their individual power to force management of companies to work harder think more creatively and act in line with their values or become at risk of being affected negatively if they do not share or follow these values all businesses have basic ethical and legal responsibilities however the most successful businesses establish a strong foundation of corporate citizenship showing a commitment to ethical behavior by creating a balance between the needs of shareholders and the needs of the community and environment in the surrounding area these practices help bring in consumers and establish brand and company loyalty in 2010 the international organization for standardization iso released a set of voluntary standards meant to help companies implement corporate social responsibility companies go through different stages during the process of developing corporate citizenship companies rise to the higher stages of corporate citizenship based on their capacity and credibility when supporting community activities a strong understanding of community needs and their dedication to incorporate citizenship within the culture and structure of their company the development of corporate citizenshipthe five stages of corporate citizenship are defined as in the elementary stage a company s citizenship activities are basic and undefined because there are scant corporate awareness and little to no senior management involvement small businesses in particular tend to linger in this stage they are able to comply with the standard health safety and environmental laws but they do not have the time nor the resources to fully develop greater community involvement in the engagement stage companies will often develop policies that promote the involvement of employees and managers in activities that exceed rudimentary compliance to basic laws citizenship policies become more comprehensive in the innovative stage with increased meetings and consultations with shareholders and through participation in forums and other outlets that promote innovative corporate citizenship policies in the integrated stage citizenship activities are formalized and blend in fluidly with the company s regular operations performance in community activities is monitored and these activities are driven into the lines of business once companies reach the transforming stage they are deeply aware that corporate citizenship is an integral part of the company s strategy it fuels sales growth allows expansion to new markets enables hiring the best talent enables acquiring cheaper capital and establishes an emotional bond and love for the brand economic and social involvement is a meshed activity of a company s daily operations in this stage corporate social responsibility csr corporate social responsibility csr is a broad concept of corporate citizenship that can take various forms depending on the company and industry through csr programs philanthropy and volunteer efforts businesses can benefit society while boosting their own brands as important as csr is for the community it is equally valuable for a company csr activities can help forge a stronger bond between employees and corporations they can boost morale and can help both employees and employers feel more connected with the world around them in order for a company to be socially responsible it first needs to be responsible for itself and its shareholders often companies that adopt csr programs have grown their business to the point where they can give back to society thus csr is primarily a strategy of large corporations also the more visible and successful a corporation is the more responsibility it has to set standards of ethical behavior for its peers competition and industry starbucks as an examplelong before its initial public offering ipo in 1992 starbucks was known for its keen sense of corporate social responsibility and commitment to sustainability and community welfare starbucks has achieved corporate citizenship milestones including 1starbucks goals include hiring 10 000 refugees across 75 countries reducing the environmental impact of its cups and engaging its employees in environmental leadership 3 | |
what is corporate culture | corporate culture refers to the values beliefs and behaviors that determine how a company s employees and management interact perform and handle business transactions often corporate culture is implied not expressly defined and develops organically over time from the cumulative traits of the people that the company hires a company s culture will be reflected in its dress code business hours office setup employee benefits turnover hiring decisions treatment of employees and clients client satisfaction and every other aspect of operations investopedia paige mclaughlinunderstanding corporate cultureawareness of corporate or organizational culture in businesses and other organizations such as universities emerged in the 1960s 1 the term corporate culture developed in the early 1980s and became widely known by the 1990s corporate culture was used during those periods by managers sociologists and other academics to describe the character of a company 2corporate culture emanated from generalized beliefs and behaviors company wide value systems management strategies employee communications and relations work environment and attitude it would go on to include company origin stories put forth by charismatic chief executive officers ceos as well as visual symbols such as logos and trademarks corporate culture is not only created by the founders management and employees of a company but is also influenced by national cultures and traditions economic trends international trade company size and products there are a variety of terms that relate to companies affected by multiple cultures especially in the wake of globalization and the increased international interaction of today s business environment these include companies often devote substantial resources and effort to create positive cross culture experiences and to facilitate a more cohesive and productive corporate culture the awareness and importance of corporate culture is more acute now than ever big four accounting firm deloitte found that 94 of executives believed that a distinct corporate culture is important for business success 3importance of corporate culturea carefully considered even innovative corporate culture can elevate companies above their competitors and support long lasting success such a culture can types of corporate cultureclan cultures are about teamwork and collaboration in such a culture those in management function as enthusiastic mentors who provide guidance to subordinates good relationships encouragement trust and participation are key aspects the contribution potential of every employee is a component of a clan culture also clan culture can easily adapt to change and implement needed action quickly adhocracy culture creates an entrepreneurial workplace in which executives and employees function as innovators and risk takers in this flexible environment agile thinking is nurtured employees are encouraged to pursue their aspirational ideas and take action to achieve results that can advance company goals new and unconventional products and services are the main outcome of the adhocracy culture market culture is focused on meeting specific targets and bottom line goals this culture creates a working environment that s competitive and demanding management is most interested in business results employees are encouraged to work hard and get the job done to enhance a company s market presence profits and stock price while employees may feel stressed in such a workplace they can also feel enthusiastic and excited about their work a hierarchy culture is a traditional corporate culture that functions according to a company s executive management and staff organizational structure that is it follows the chain of command from top down where executives oversee employees and their work efforts to meet specific goals the hierarchy culture prizes stability and conventional methods of operation the work environment can be seen as more rigid than some other cultures but employees can clearly understand their roles and objectives they may also feel a sense of security because of the more conservative approach to running a company examples of contemporary corporate culturesjust as national cultures can influence and shape corporate culture so can a company s management strategy in top companies of the 21st century such as google apple inc aapl and netflix inc nflx less traditional management strategies that foster creativity collective problem solving and greater employee freedom have been the norm they are thought to contribute to business success alphabet googl the parent of google is well known for its employee friendly corporate culture it explicitly defines itself as unconventional and offers perks such as telecommuting flextime tuition reimbursement free employee lunches and on site doctors at its corporate headquarters in mountain view calif the company offers on site services such as oil changes car washes massages fitness classes and a hairstylist its corporate culture helped it to consistently be regarded as one of the best places to work progressive policies such as comprehensive employee benefits and alternatives to hierarchical leadership even doing away with closed offices and cubicles have been trends that reflect a more tech conscious modern generation of corporate culture these trends mark a change from earlier aggressive individualistic and high risk corporate cultures such as that of former energy company enron high profile examples of alternative management strategies that significantly affect corporate culture include holacracy this has been put to use at shoe company zappos owned by amazon amzn and agile management techniques applied at music streaming company spotify holacracy is an open management philosophy that among other things eliminates job titles and other such traditional hierarchies employees have flexible roles and self organization and collaboration is highly valued zappos instituted this program in 2013 and has met the challenge of transition with varying success and criticism 4similarly spotify a music streaming service uses the principles of agile management as part of its unique corporate culture agile management in essence focuses on deliverables with a flexible trial and error strategy that often groups employees in a start up environment approach to creatively tackle the company s issues at hand characteristics of successful corporate culturescorporate cultures whether shaped intentionally or grown organically express the core of a company s ideology and practice they affect every aspect of a business from each employee and customer to a company s public image when an organization strives to be multicultural it hires workers from diverse backgrounds to work in every department and at all levels of management the harvard business review identified six important characteristics of successful corporate cultures in 2013 5first and foremost is vision whether communicated via a simple mission statement or a corporate manifesto a company s vision can be a powerful tool values while a broad concept can embody the thinking and perspectives necessary to achieve a company s vision they can serve as a beacon for behavior necessary to progress toward all manner of success examples of values include fairness trustworthiness integrity performance excellence teamwork and a high quality customer experience for example google s famous slogan don t be evil is an expression of values practices are the tangible methods guided by ethics by which a company implements its values for example netflix emphasizes the importance of knowledge based high achieving employees and as such netflix pays its employees at the top of their market salary range rather than through an earn your way to the top philosophy people come next with companies employing and recruiting in a way that reflects and enhances their overall culture plus people are the key to bringing corporate culture to life and obtaining the high value performances that can lead to favorable business outcomes lastly narrative and place are perhaps the most modern characteristics of corporate culture having a powerful narrative or origin story such as that involving steve jobs and apple is important for growth and public image the place of business such as the city of choice and also the office design and architecture is one of the most cutting edge advents in contemporary corporate culture other characteristics of corporate culture can include employees should be encouraged and trained to work together with camaraderie and trust toward common goals the benefits of teamwork such as problem solving the development of innovative ideas and improved productivity should be demonstrated to the workforce companies should provide the means for employees to improve their skills and enhance their knowledge so that the vision and goals of the company can be more reliably reached training and education can also provide employees with a path to new opportunities within their companies this can motivate individuals to learn and do more innovation is exciting and can underscore the spirit of a company s vision it can instill pride confidence and loyalty in the workforce a company s management including c suite executives should be accessible and open to providing assistance that supports all employees | |
how to develop a corporate culture | there is no single strategy for building a corporate culture because companies industries and people can be so different however the basic steps below may help you envision a corporate culture that spells success for your employees clients and company | |
what s meant by corporate culture | the term corporate culture refers to the values beliefs and practices associated with a particular corporation for instance corporate culture might be reflected in the way a corporation hires and promotes employees or in its corporate mission statement some companies seek to associate themselves with a specific set of values such as by defining themselves as an innovative or environmentally conscious organization | |
what are some examples of corporate culture | there are many examples of companies with well defined corporate cultures alphabet inc for example is known for its employee centric culture and its emphasis on working in a creative and flexible environment whereas amazon is known for its relentless pursuit of customer service and operational efficiencies often national cultures will play a role in determining the kind of corporate culture that is prevalent in society for example japanese corporations are known for having markedly different corporate cultures as compared to those of american or european companies | |
why is corporate culture important | corporate culture is important because it can support important business objectives employees for example might be attracted to companies whose cultures they identify with which in turn can drive employee retention and new talent acquisition fostering a culture of innovation can be critical to maintaining a competitive edge with respect to patents or other forms of intellectual property similarly corporate culture can also play a role in marketing the company to customers and to society at large thereby doubling as a form of public relations the bottom linecorporate culture has become a vital even essential ingredient in the ongoing success of a business it represents the values beliefs and goals of a company as well as the consistent behavior expected from all employees from top to bottom not only is corporate culture an important key to attracting and retaining employees it can also support high quality employee performance ongoing achievement and the longevity of a company | |
what is corporate finance | corporate finance is a subfield of finance that deals with how corporations address funding sources capital structuring accounting and investment decisions corporate finance is also often concerned with maximizing shareholder value through long and short term financial planning and implementing various strategies corporate finance activities range from capital investment to tax considerations investopedia julie bangunderstanding corporate financecorporate finance has three main areas capital budgeting capital financing and working capital management capital budgeting is the process of prioritizing funds toward the most profitable projects capital financing is determining how a company s investments and endeavors will be financed working capital management is concerned with cash flow for day to day operations and maintaining liquidity while not necessarily an area of corporate finance dividend distributions to shareholders are also a main concern because in a publicly owned company shareholders are usually owners and expect returns for their investments corporate finance activitiescorporate finance tasks include capital investing financing and liquidity management corporate finance tasks include making capital investments and deploying a company s long term capital the capital investment decision process is primarily concerned with capital budgeting through capital budgeting a company identifies capital expenditures estimates future cash flows from proposed capital projects compares planned investments with potential proceeds and decides which projects to include in its capital budget making capital investments is perhaps the most important corporate finance task and can have serious business implications poor capital budgeting e g excessive investing or under funded investments can compromise a company s financial position either because of increased financing costs or inadequate operating capacity corporate financing includes the activities involved with a corporation s financing investment and capital budgeting decisions corporate finance also involves sourcing capital in the form of debt or equity a company may borrow from commercial banks and other financial intermediaries or may issue debt securities in the capital markets through investment banks a company may also choose to sell stocks to equity investors especially when it needs large amounts of capital for business expansions capital financing is a balancing act involving decisions about the necessary amounts of debt and equity having too much debt may increase default risk and relying heavily on equity can dilute earnings and value for early investors in the end though capital financing must provide the capital needed to implement capital investments the goal of capital management is to ensure that there is enough liquidity in the short term to carry out continuing operations short term financial management concerns current assets and current liabilities working capital and operating cash flows a company must be able to meet all its current obligations when they are due this involves having enough current liquid assets to avoid disrupting a company s operations short term financial management may also involve getting additional credit lines or issuing commercial paper as liquidity backup working in corporate financepositions in the area of corporate finance attract many job seekers in fact there s typically great competition for many of these types of jobs some of the many corporate finance job titles include corporate finance salaries can vary among companies but according to the top job site indeed the national average annual salaries for the positions noted above are 1 | |
what does corporate finance do | corporate finance departments in companies focus on solid decision making for profitable financial results thus corporate finance involves activities that relate to the budgeting of capital the debt and equity used to finance operations management of working capital and shareholder dividends | |
what is corporate finance vs finance | corporate finance is one of the subfields of the overall finance category the others include public or government finance and personal finance | |
what are the 3 main areas of corporate finance | the main areas of corporate finance are capital budgeting e g for investing in company projects capital financing deciding how to fund projects operations and working capital management managing assets and liabilities to operate efficiently the bottom linecorporate finance is a subset of the field of finance it concerns proper budgeting raising capital to meet company needs and objectives with debt and or equity and the efficient management of a company s current assets and liabilities the various jobs in corporate finance can pay well | |
what is corporate governance | corporate governance is the system of rules practices and processes by which a company is directed and controlled corporate governance essentially involves balancing the interests of a company s many stakeholders which can include shareholders senior management customers suppliers lenders the government and the community as such corporate governance encompasses practically every sphere of management from action plans and internal controls to performance measurement and corporate disclosure understanding corporate governancegovernance refers to the set of rules controls policies and resolutions put in place to direct corporate behavior a board of directors is pivotal in governance while proxy advisors and shareholders are important stakeholders who can affect governance communicating a company s corporate governance is a key component of community and investor relations for instance apple inc s investor relations site profiles its corporate leadership the executive team and board of directors and provides information on its committee charters and governance documents such as bylaws stock ownership guidelines and articles of incorporation 1most successful companies strive to have exemplary corporate governance for many shareholders it is not enough for a company to be profitable it also must demonstrate good corporate citizenship through environmental awareness ethical behavior and other sound corporate governance practices benefits of corporate governancecorporate governance and the board of directorsthe board of directors is the primary direct stakeholder influencing corporate governance directors are elected by shareholders or appointed by other board members and charged with representing the interests of the company s shareholders the board is tasked with making important decisions such as corporate officer appointments executive compensation and dividend policy in some instances board obligations stretch beyond financial optimization as when shareholder resolutions call for certain social or environmental concerns to be prioritized boards are often made up of a mix of insiders and independent members insiders are generally major shareholders founders and executives independent directors do not share the ties that insiders have they are typically chosen for their experience managing or directing other large companies independents are considered helpful for governance because they dilute the concentration of power and help align shareholder interests with those of the insiders the board of directors must ensure that the company s corporate governance policies incorporate corporate strategy risk management accountability transparency and ethical business practices a board of directors should consist of a diverse group of individuals including those with matching business knowledge and skills and others who can bring a fresh perspective from outside the company and industry the principles of corporate governancewhile there can be as many principles as a company believes make sense some of the most common ones are corporate governance modelsthere are many types of corporate governance that a company might follow some use a traditional hierarchical leadership structure and others are more flexible different corporate governance models may be found throughout the world here are a few of them this model can take various forms such as the shareholder stewardship and political models the shareholder model is the principal model at present the shareholder model is designed so that the board of directors and shareholders are in control stakeholders such as vendors and employees though acknowledged lack control management is tasked with running the company in a way that maximizes shareholder interest importantly proper incentives should be made available to align management behavior with the goals of shareholders owners the model accounts for the fact that shareholders provide the company with funds and may withdraw that support if dissatisfied this is supposed to keep management working effectively the board will usually consist of both insiders and independent members although traditionally the board chairperson and the ceo can be the same this model seeks to have two different people hold those roles the success of this corporate governance model depends on ongoing communications among the board company management and the shareholders important issues are brought to shareholders attention important decisions that need to be made are put to shareholders for a vote u s regulatory authorities tend to support shareholders over boards and executive management two groups represent the controlling authority under the continental model they are the supervisory board and the management board in this two tiered system the management board is composed of company insiders such as its executives the supervisory board is made up of outsiders such as shareholders and union representatives banks with stakes in a company also could have representatives on the supervisory board the two boards remain entirely separate the size of the supervisory board is determined by a country s laws and can t be changed by shareholders national interests have a strong influence on corporations with this model of corporate governance companies can be expected to align with government objectives this model also greatly values the engagement of stakeholders as they can support and strengthen a company s continued operations the key players in the japanese model of corporate governance are banks affiliated entities major shareholders called keiretsu who may be invested in common companies or have trading relationships management and the government smaller independent individual shareholders have no role or voice together these key players establish and control corporate governance the board of directors is usually made up of insiders including company executives keiretsu may remove directors from the board if profits wane the government affects the activities of corporate management via its regulations and policies in this model corporate transparency is less likely because of the concentration of power and the focus on the interests of those with that power | |
how to assess corporate governance | as an investor you want to select companies that practice good corporate governance in the hope that you can thereby avoid losses and other negative consequences such as bankruptcy you can research certain areas of a company to determine whether or not it s practicing good corporate governance these areas include types of bad governance practices include examples of corporate governance bad and goodbad corporate governance can cast doubt on a company s reliability integrity or obligation to shareholders all can have implications for the financial health of the business tolerance or support of illegal activities can create scandals like the one that rocked volkswagen ag starting in september 2015 the details of dieselgate as the affair came to be known revealed that for years the automaker had deliberately and systematically rigged engine emission equipment in its cars to manipulate pollution test results in the u s and europe volkswagen saw its stock shed nearly half its value in the days following the start of the scandal its global sales in the first full month following the news fell 4 5 2vw s board structure facilitated the emissions rigging and was a reason it wasn t caught earlier in contrast to a one tier board system common to most u s companies vw had a two tier board system consisting of a management board and a supervisory board in keeping with the continental model of corporate governance the supervisory board was meant to monitor management and approve corporate decisions however it lacked the independence and authority to carry out these roles appropriately the supervisory board included a large portion of shareholders ninety percent of shareholder voting rights were controlled by members of the board there was no real independent supervisor as a result shareholders were in control and negated the purpose of the supervisory board which was to oversee management and employees and how they operated this allowed the rigged emissions to occur public and government concern about corporate governance tends to wax and wane often however highly publicized revelations of corporate malfeasance revive interest in the subject for example corporate governance became a pressing issue in the united states at the turn of the 21st century after fraudulent practices bankrupted high profile companies such as enron and worldcom the problem with enron was that its board of directors waived many rules related to conflicts of interest by allowing the chief financial officer cfo andrew fastow to create independent private partnerships to do business with enron these private partnerships were used to hide enron s debts and liabilities if they d been accounted for properly they would have reduced the company s profits significantly 3enron s lack of corporate governance allowed the creation of the entities that hid the losses the company also employed dishonest people from fastow down to its traders who made illegal moves in the markets the enron scandal and others in the same period resulted in the 2002 passage of the sarbanes oxley act it imposed more stringent recordkeeping requirements on companies and stiff criminal penalties for violating them and other securities laws the aim was to restore confidence in public companies and how they operate it s common to hear examples of bad corporate governance in fact it s often why companies end up in the news you rarely hear about companies with good corporate governance because their corporate guiding policies keep them out of trouble one company that seems to have consistently practiced good corporate governance and adapts or updates it often is pepsico in drafting its 2020 proxy statement pepsico sought input from investors in six areas the company included in its proxy statement a graphic of its current leadership structure it showed a combined chair and ceo along with an independent presiding director and a link between the company s winning with purpose vision and changes to the executive compensation program 4 | |
what are the 4 ps of corporate governance | the four p s of corporate governance are people process performance and purpose | |
why is corporate governance important | corporate governance is important because it creates a system of rules and practices that determines how a company operates and how it aligns with the interest of all its stakeholders good corporate governance fosters ethical business practices which lead to financial viability in turn that can attract investors | |
what are the basic principles of corporate governance | the basic principles of corporate governance are accountability transparency fairness responsibility and risk management the bottom linecorporate governance consists of the guiding principles that a company puts in place to direct all of its operations from compensation risk management and employee treatment to reporting unfair practices dealing with the impact on the climate and more corporate governance that calls for upstanding transparent behavior can lead a company to make ethical decisions that will benefit all of its stakeholders including investors bad corporate governance can lead to the breakdown of a company often resulting in scandal and bankruptcy | |
what is corporate hierarchy | the term corporate hierarchy refers to the arrangement and organization of individuals within a corporation according to power status and job function in general a hierarchy is any system or organization in which people or groups are ranked one above the other according to status or authority while most corporations and businesses have hierarchies they can also be part of any organization including governments and any organized religion a corporate hierarchy delineates both authority and responsibility and designates leadership over a corporation s employees departments divisions and other executives depending on their place within the strata a corporate hierarchy may also be referred to as the chain of command within a business because it outlines where decision makers reside it also defines who must adhere to those orders and who may supersede and make changes to the plans of their subordinates the corporate hierarchy ultimately affects the ability of employees of a company to advance within the company and can also impact corporate culture understanding corporate hierarchymost corporate hierarchies resemble a pyramid where the most powerful person is at the top and their subordinates sit underneath those with the least amount of power generally regular employees sit at the bottom of the pyramid in the bullpen some firms though may have horizontal hierarchies where power and responsibility are more evenly spread across the firm businesses and corporations are organized in a hierarchical structure so management can run the company in a managed way when businesses are small or just starting out the organizational structure may be fairly simple but as companies grow the structure becomes more complex in a public company the board of directors is a group of people elected or appointed to represent the interests of shareholders the board has certain duties such as hiring and firing executives setting executive compensation establishing dividends and other administrative policies this group is led by a chairperson who usually resides at the top of the hierarchy 1the next group is made up of the company s executive officers led by the chief executive officer ceo the ceo is the highest ranking executive the ceo s duties include making major corporate decisions and managing the overall operations of the corporation other executives include the chief financial officer cfo the chief operating officer coo and the chief information officer cio all of whom require a great deal of executive experience the next rung on the corporate hierarchy ladder is inhabited by a company s vice presidents and directors some of the functions of this level include corporate functions including sales marketing research and development r d and human resources other levels of the hierarchy include managers who deal specifically with smaller departments of the company they are also in charge of regular employees who do the jobs that keep the company running these people are typically at the bottom of the hierarchy a person s hierarchical position also determines how much they get paid the higher the position the higher the compensation the configuration of a corporate hierarchy typically evolves as an organization matures the founding team may make up the executive leadership which can have a loose structure when a company launches as more managers employees and investors become part of the endeavor new layers are inevitably introduced to give clarity to the organization s operational flow and the duties of each member there are companies that claim to have a nontraditional corporate hierarchy typically as a means to share responsibility among all employees and leaders this may also influence elements of corporate culture such as the layout of the company s office in many organizations the higher one s standing is in the hierarchy the greater the effect on the size location and aesthetics of the workspace premium office space for instance is often reserved for executives access to perks such as chambers reserved for executive use or if it is within the company s means use of private jets and car service may also be an amenity reserved for members of upper leadership | |
what is csr | corporate social responsibility csr is a self regulating business model that helps a company be socially accountable to itself its stakeholders and the public by practicing corporate social responsibility also called corporate citizenship companies are aware of how they impact aspects of society including economic social and environmental engaging in csr means a company operates in ways that enhance society and the environment instead of contributing negatively to them understanding corporate social responsibility csr through corporate social responsibility programs philanthropy and volunteer efforts businesses can benefit society while boosting their brands a socially responsible company is accountable to itself and its shareholders csr is commonly a strategy employed by large corporations the more visible and successful a corporation is the more responsibility it has to set standards of ethical behavior for its peers competition and industry small and midsize businesses also create social responsibility programs although their initiatives are rarely as well publicized as those of larger corporations types of csrsome corporate social responsibility models replace financial responsibility with a sense of volunteerism otherwise most models still include environmental ethical and philanthropic as types of csr benefits of csraccording to a study published in the journal of consumer psychology consumers are more likely to act favorably toward a company that has acted to benefit its customers 1 as a company engages in csr it is more likely to receive favorable brand recognition additionally workers are more likely to stay with a company they believe in this reduces employee turnover disgruntled workers and the total cost of a new employee for companies looking to outperform the market enacting csr strategies may improve how investors view the company s value the boston consulting group found that companies considered leaders in environmental social or governance matters had an 11 valuation premium over their competitors 2csr practices help companies mitigate risk by avoiding troubling situations this includes preventing adverse activities such as discrimination against employee groups disregard for natural resources unethical use of company funds and activity that leads to lawsuits and litigation csr programs can raise morale in the workplace 3 | |
what is a corporate tax rate | the federal corporate tax rate in the united states is 21 and it applies to a corporation s profits the taxes are paid on a company s taxable income which includes revenue minus expenses expenses include cost of goods sold cogs general and administrative g a expenses selling and marketing research and development depreciation and other operating costs corporate tax rates vary widely by country with some countries considered to be tax havens due to their low rates corporate taxes can be lowered by various deductions government subsidies and tax loopholes and so the effective corporate tax rate the rate a corporation actually pays is usually lower than the statutory rate the stated rate before any deductions understanding corporate taxthe federal corporate tax rate in the united states is currently a flat 21 as a result of the tax cuts and jobs act tcja 1 which president donald trump signed into law in 2017 and which went into effect in 2018 previously the maximum u s corporate income tax rate was 35 2u s corporate tax returns are generally due by the 15th day of the fourth month following the end of the corporation s tax year 4 corporations may request a six month extension to file their corporate tax returns in september installment payment due dates for estimated tax returns occur in the middle of april june september and december 5 corporate taxes are reported on form 1120 for u s corporations if a corporation has more than 10 million in assets it must file online 6some states impose a corporate income tax which can run from a few percentage points in north carolina to double digits in new jersey corporate tax deductionscorporations are permitted to reduce taxable income by certain necessary and ordinary business expenditures all current expenses required for the operation of the business are fully tax deductible investments and real estate purchased with the intent of generating income for the business are also deductible a corporation can deduct employee salaries health benefits tuition reimbursement and bonuses in addition a corporation can reduce its taxable income by deducting insurance premiums travel expenses bad debts interest payments sales taxes fuel taxes and excise taxes tax preparation fees legal services bookkeeping and advertising costs can also be used to reduce business income 7special considerationsa central issue relating to corporate taxation is the concept of double taxation certain corporations are taxed on the taxable income of the company if this net income is distributed to shareholders these individuals are forced to pay individual income taxes on the dividends received instead a business may register as an s corporation and have all income pass through to the business owners an s corporation does not pay corporate tax as all taxes are paid through individual tax returns 3advantages of a corporate taxpaying corporate taxes can be more beneficial for business owners than paying additional individual income tax corporate tax returns deduct medical insurance for families as well as fringe benefits including retirement plans and tax deferred trusts it is easier for a corporation to deduct losses too a corporation may deduct the entire amount of losses while a sole proprietor must provide evidence regarding the intent to earn a profit before the losses can be deducted finally profit earned by a corporation may be left within the corporation allowing for tax planning and potential future tax advantages | |
what are tax brackets for c corp | a flat corporate tax rate of 21 is levied on c corporations this has been the case since the passage of the tax cuts and jobs act which president donald trump signed into law in 2017 in other words there are no brackets any longer | |
what is the tax difference between an llc and a c corp | a core difference between an llc and a c corporation lies in the way the entitites are taxed c corporations are taxed at the corporate level at the corporate tax rate by comparison llcs can be treated like pass through entities for their owners meaning that the owners report profits or losses for the llcs on their own personal tax returns this circumvents double taxation something that c corporations can not do | |
what country has the lowest corporate tax rate | a few countries have no corporate tax at all including the bahamas bahrain and the united arab emirates many others have notably low corporate tax rates including barbados which has a corporate tax rate of 5 5 turkmenistan which has one of 8 and hungary which has one of 9 the bottom linethe corporate tax rate is a tax levied on a corporation s profits collected by a government as a source of income it applies to a company s income which is revenue minus expenses in the u s the federal corporate tax rate is a flat rate of 21 states may also impose a separate corporate tax on companies companies often seek to lower their corporate tax obligations through taking advantage of deductions loopholes subsidies and other practices | |
what is a corporation | a corporation is a legal entity that is separate and distinct from its owners under the law corporations possess many of the same rights and responsibilities as individuals they can enter into contracts loan and borrow money sue and be sued hire employees own assets and pay taxes a distinguishing characteristic of a corporation is limited liability its shareholders profit through dividends and stock appreciation but they are not personally liable for the company s debts almost all large businesses are corporations including microsoft corporation and the coca cola company investopedia julie bangincorporationa corporation is created when a business is incorporated by a group of shareholders with a common goal shareholders share ownership of a business as represented by their holding of stock shares corporations may return a profit to their shareholders some corporations such as charities and fraternal organizations are nonprofit or not for profit a private or closed corporation may have a single shareholder or several publicly traded corporations have many shareholders in the u s corporations are created and regulated by state laws public corporations are regulated by federal law through the securities and exchange commission sec 1for their owners both a limited liability company llc and a corporation offer similar legal advantages a primary advantage is that shareholders cannot be held personally liable for the debts of either entity legal requirementseach state has its own laws regarding incorporation most states require the owners to file articles of incorporation with the state and then issue stock to the company s shareholders the shareholders elect a board of directors in an annual meeting turning a private corporation into a public corporation is complex as the company must comply with federal laws requiring full and public disclosure of financial information to potential shareholders and the government operating a corporationthe shareholders of a corporation typically receive one vote per share and may hold an annual meeting during which they elect a board of directors the board hires and oversees the senior management responsible for the corporation s day to day activities the board of directors also executes the corporation s business plan although the members are not personally responsible for the corporation s debts they owe a duty of care to the corporation and can incur personal liabilities if they neglect this duty some tax statutes also provide for the personal liabilities of the board of directors liquidating a corporationincorporation can be ended using the process called liquidation this may result from a voluntary decision to cease operations or may be forced by the financial collapse of the business a company appoints a liquidator who sells the corporation s assets the company pays off its creditors and distributes any remaining money to the shareholders an involuntary liquidation is triggered by the creditors of a corporation that has failed to pay its bills if the situation cannot be resolved it is followed by a filing for bankruptcy | |
what is a corporation vs a business | many businesses are corporations and vice versa a business can choose to operate without incorporating or it may seek to incorporate in order to establish its existence as a legal entity separate from its owners this means that the owners cannot be held responsible for the debts of the corporation it also means that the corporation can own assets sue or be sued and borrow money | |
how is a corporation formed | to form a corporation in the u s it is necessary to file articles of incorporation with the state in which it will be registered the details vary from state to state in the u k ireland and canada corporations may use the abbreviation ltd which stands for limited after the company s name they might also appear as public limited companies plcs | |
what is the difference between a limited liability company and a corporation | both a limited liability company llc and a corporation are structures that offer similar legal advantages to their owners for example owners cannot be held liable for the debts of either a corporation or for the most part an llc an llc is a pass through entity that is its profits and the responsibility to pay taxes on the profits are passed to the owners rather than being paid by the llc establishing an llc is a relatively straightforward process by comparison a corporation must elect a board of directors conduct annual meetings and adopt bylaws the bottom linea corporation may be formed by an individual or group with a shared goal and can be a for profit or not for profit entity corporations possess many of the same legal rights and responsibilities as individuals the limited liability nature of a corporation means that its shareholders are not personally responsible for the company s debts | |
what is a correction | in investing a correction is usually defined as a decline of 10 or more in the price of a security from its most recent peak 1 corrections can happen to individual assets like an individual stock or bond or to an index measuring a group of assets an asset index or market may fall into a correction either briefly or for sustained periods days weeks months or even longer however the average market correction is short lived and lasts anywhere between three and four months 2investors traders and analysts use charting methods to predict and track corrections many factors can trigger a correction from a large scale macroeconomic shift to problems in a single company s management plan the reasons behind a correction are as varied as the stocks indexes or markets they affect | |
how a correction works | corrections are like that spider under your bed you know it s there lurking but don t know when it will make its next appearance while you might lose sleep over that spider you shouldn t lose sleep over the possibility of a correction according to a 2018 report from cnbc and goldman sachs the average correction for the s p 500 lasted only four months and values fell around 13 before recovering 3 however it is easy to see why an individual or novice investor may worry about a 10 or greater downward adjustment to the value of their portfolio assets during a correction many do not see it coming and don t know how long the correction will last for those who remain in the market for the long term however a correction is only a small pothole on the road to retirement savings 4 the market will eventually recover so they should not panic of course a dramatic correction that occurs in the course of one trading session can be disastrous for a short term or day trader and those traders who are extremely leveraged these traders could see significant losses during times of corrections no one can pinpoint when a correction will start end or tell how drastic of a drop prices will take until after it s over what analysts and investors can do is look at the data of past corrections and plan accordingly charting a correctioncorrections can sometimes be projected using market analysis and by comparing one market index to another using this method an analyst may discover that an underperforming index may be followed closely by a similar index that is also underperforming a steady trend of these similarities may be a sign that a market correction is imminent technical analysts review price support and resistance levels to help predict when a reversal or consolidation may turn into a correction technical corrections happen when an asset or the entire market gets overinflated analysts use charting to track the changes over time in an asset index or market some of the tools they use to determine where to expect price support and resistance levels include bollinger bands envelope channels and trendlines preparing investments for a correctionbefore a market correction individual stocks may be strong or even outperforming during a correction period individual assets frequently perform poorly due to adverse market conditions corrections can create an ideal time to buy high value assets at discounted prices however investors must still weigh the risks involved with purchases as they could well see a further decline as the correction continues protecting investments against corrections can be difficult but doable to deal with declining equity prices investors can set stop loss orders or stop limit orders the former is automatically triggered when a price hits a level pre set by the investor however the transaction may not get executed at that price level if prices are falling fast the second stop order sets both a specified target price and an outside limit price for the trade stop loss guarantees execution where stop limit guarantees price stop orders should be regularly monitored to ensure they reflect current market situations and true asset values also many brokers will allow stop orders to expire after a period investing during a correctionwhile a correction can affect all equities it often hits some equities harder than others small cap high growth stocks in volatile sectors like technology tend to react the strongest 5 other sectors are more buffered consumer staples stocks for example tend to be business cycle proof as they involve the production or retailing of necessities 6 so if a correction is caused by or deepens into an economic downturn these stocks still perform diversification also offers protection if it involves assets that perform in opposition to those being corrected or those that are influenced by different factors bonds and investment vehicles have traditionally been a counterweight to equities for example real or tangible assets like commodities or real estate are another option to financial assets like stocks although market corrections can be challenging and a 10 drop may significantly hurt many investment portfolios corrections are sometimes considered positive for both the market and for investors for the market corrections can help to readjust and recalibrate asset valuations that may have become unsustainably high for investors corrections can provide both the opportunity to take advantage of discounted asset prices as well as to learn valuable lessons on how rapidly market environments can change creates buying opportunities into high value stockscan be mitigated by stop loss limit orderscalms overinflated marketscan lead to panic oversellingharms short term investors leveraged traderscan turn into prolonged declinereal world examples of a correctionmarket corrections occur relatively often between 1980 and 2020 the s p 500 experienced 18 corrections 7 five of these corrections resulted in bear markets which are generally indicators of economic downturns 8 the others remained or transitioned back into bull markets which are usually indicators of economic growth and stability 9take 2018 for example in february 2018 two major indexes the dow jones industrial average djia and the s p 500 both experienced corrections dropping by more than 10 both the nasdaq and the s p 500 also experienced corrections in late october 2018 10each time the markets rebounded then another correction occurred dec 17 2018 and both the djia and the s p 500 dropped over 10 the s p 500 fell 15 from its all time high 11 declines continued into early january with predictions that the u s had finally ended a bear market abounding 12the markets began to rally erasing all the year s losses by the end of january and by april 2019 the s p 500 was up about 20 since the dark days of december 13 | |
what is correlation | correlation in the finance and investment industries is a statistic that measures the degree to which two securities move in relation to each other correlations are used in advanced portfolio management computed as the correlation coefficient which has a value that must fall between 1 0 and 1 0 investopedia sydney saporito | |
what correlation can tell you | correlation shows the strength of a relationship between two variables and is expressed numerically by the correlation coefficient the correlation coefficient s values range between 1 0 and 1 0 a perfect positive correlation means that the correlation coefficient is exactly 1 this implies that as one security moves either up or down the other security moves in lockstep in the same direction a perfect negative correlation means that two assets move in opposite directions while a zero correlation implies no linear relationship at all for example large cap mutual funds generally have a high positive correlation to the standard and poor s s p 500 index or nearly one small cap stocks tend to have a positive correlation to the s p but it s not as high or approximately 0 8 however put option prices and their underlying stock prices will tend to have a negative correlation a put option gives the owner the right but not the obligation to sell a specific amount of an underlying security at a pre determined price within a specified time frame put option contracts become more profitable when the underlying stock price decreases in other words as the stock price increases the put option prices go down which is a direct and high magnitude negative correlation | |
how to calculate correlation | there are several methods of calculating correlation the most common method the pearson product moment correlation is discussed further in this article the pearson product moment correlation measures the linear relationship between two variables it can be used for any data set that has a finite covariance matrix here are the steps to calculate correlation to avoid the complex manual calculation consider using the correl function in excel using the pearson product moment correlation method the following formula can be used to find the correlation coefficient r r n x y x y n x 2 x 2 n y 2 y 2 where r correlation coefficient n number of observations begin aligned r frac n times sum x y sum x times sum y sqrt n times sum x 2 sum x 2 times n times sum y 2 sum y 2 textbf where r text correlation coefficient n text number of observations end aligned r n x2 x 2 n y2 y 2 n x y x y where r correlation coefficientn number of observations example of correlationinvestment managers traders and analysts find it very important to calculate correlation because the risk reduction benefits of diversification rely on this statistic financial spreadsheets and software can calculate the value of correlation quickly as a hypothetical example assume that an analyst needs to calculate the correlation for the following two data sets x 41 19 23 40 55 57 33 y 94 60 74 71 82 76 61 there are three steps involved in finding the correlation the first is to add up all the x values to find sum x add up all the y values to fund sum y and multiply each x value with its corresponding y value and sum them to find sum x y sum x 41 19 23 40 55 57 33 268sum y 94 60 74 71 82 76 61 518sum x y 41 x 94 19 x 60 23 x 74 33 x 61 20 391the next step is to take each x value square it and sum up all these values to find sum x 2 the same must be done for the y values sum x 2 41 2 19 2 23 2 33 2 11 534sum y 2 94 2 60 2 74 2 61 2 39 174noting that there are seven observations n the following formula can be used to find the correlation coefficient r r n x y x y n x 2 x 2 n y 2 y 2 where r correlation coefficient n number of observations begin aligned r frac n times sum x y sum x times sum y sqrt n times sum x 2 sum x 2 times n times sum y 2 sum y 2 textbf where r text correlation coefficient n text number of observations end aligned r n x2 x 2 n y2 y 2 n x y x y where r correlation coefficientn number of observations in this example the correlation would be r 7 x 20 391 268 x 518 squareroot 7 x 11 534 268 2 x 7 x 39 174 518 2 3 913 7 248 4 0 54correlation and portfolio diversificationin investing correlation is most important in relation to a diversified portfolio investors who wish to mitigate risk can do so by investing in non correlated assets for example consider an investor who owns airline stock if the airline industry is found to have a low correlation to the social media industry the investor may choose to invest in a social media stock understanding that an negative impact to one industry may not impact the other this is often the approach when considering investing across asset classes stocks bonds precious metals real estate cryptocurrency commodities and other types of investments each have different relationships to each other while some may be heavily correlated others may act as a hedge to diversify risk if they are not correlated risk that can be diversified away is called unsystematic risk this type of risk is specific to a company industry or asset class investing in different assets can reduce your portfolio s correlation and reduce your exposure to unsystematic risk special considerationscorrelation is often dictated and related to other statistical considerations it is common to see correlation cited when statistics is used to analyze variables in statistics a p value is used to indicate whether the findings are statistically significant it is possible to determine that two variables are correlated but there may not be enough supporting evidence to state this as a strong claim a high p value indicates there is enough evidence to meaningfully conclude that the population correlation coefficient is different from zero the easiest way to visualize whether two variables are correlated is to graphically depict them using a scatterplot each point on a scatterplot represents one sample item the x axis of the scatterplot represents one of the variables being tested while the y axis of the scatter plot represents the other the correlation coefficient of the two variables is depicted graphically often as a linear line mapped to show the relationship of the two variables if the two variables are positively correlated an increasing linear line may be drawn on the scatterplot if two variables are negatively correlated a decreasing linear line may be draw the stronger the relationship of the data points the closer each data point will be to this line scatterplots may be more useful when analyzing more complex data that might have changing relationships for example two variables may be positively correlated to a certain point then their relationship becomes negatively correlated this non linear relationship may be more difficult to identify using formulas but can be easier to spot when graphed on a scatterplot last scatterplots can easily depict correlation when they incorporate density shading a density shade or density ellipse is a shaded area on a scatterplot that visually shows the densest region of data points on a scatterplot the density ellipses will often mirror the direction of a linear correlation line if variables are related otherwise density ellipses that are more circular with no defined direction indicate lower correlation another inherent difficulty in statistics is determining whether relationships between two variables are caused by those variables consider the following statement most basketball players are tall therefore if you play basketball you will become tall it s clear that the statement above is not true individuals who are tall and understand this advantage may gravitate to basketball because their natural physical abilities best suit them for the sport however because height and activity in basketball may be positively correlated statisticians and data scientists must be aware that a strong relationship between two variables may or may be caused due to any one of the variables limitations of correlationlike other aspects of statistical analysis correlation can be misinterpreted small sample sizes may yield unreliable results even if it appears as though correlation between two variables is strong alternatively a small sample size may yield uncorrelated findings when the two variables are in fact linked correlation is often skewed when an outlier is present correlation only shows how one variable is connected to another and may not clearly identify how a single instance or outcome can impact the correlation coefficient correlation may also be misinterpreted if the relationship between two variables is nonlinear it is much easier to identify two variables with a positive or negative correlation however two variables may still be correlated with a more complex relationship | |
what is correlation | correlation is a statistical term describing the degree to which two variables move in coordination with one another if the two variables move in the same direction then those variables are said to have a positive correlation if they move in opposite directions then they have a negative correlation | |
why are correlations important in finance | correlations play an important role in finance because they are used to forecast future trends and to manage the risks within a portfolio these days the correlations between assets can be easily calculated using various software programs and online services correlations along with other statistical concepts play an important role in the creation and pricing of derivatives and other complex financial instruments | |
what is an example of how correlation is used | correlation is a widely used concept in modern finance for example a trader might use historical correlations to predict whether a company s shares will rise or fall in response to a change in interest rates or commodity prices similarly a portfolio manager might aim to reduce their risk by ensuring that the individual assets within their portfolio are not overly correlated with one another | |
is high correlation better | investors may have a preference on the level of correlation within their portfolio in general most investors will prefer to have a lower correlation as this mitigates risk in their portfolios of different assets or securities being impacted by similar market conditions however risk seeking investors or investors wanting to put their money into a very specific type of sector or company may be willing to have higher correlation within their portfolio in exchange for greater potential returns | |
what is the correlation coefficient | the correlation coefficient is a statistical measure of the strength of a linear relationship between two variables its values can range from 1 to 1 a correlation coefficient of 1 describes a perfect negative or inverse correlation with values in one series rising as those in the other decline and vice versa a coefficient of 1 shows a perfect positive correlation or a direct relationship a correlation coefficient of 0 means there is no linear relationship correlation coefficients are used in science and finance to assess the degree of association between two variables factors or data sets for example as high oil prices are favorable for crude producers one might assume that the correlation between oil prices and forward returns on oil stocks is strongly positive calculating the correlation coefficient for these variables based on market data reveals a moderate and inconsistent correlation over lengthy periods 1understanding the correlation coefficientdifferent types of correlation coefficients are used to assess correlation based on the properties of the compared data by far the most common is the pearson coefficient known as pearson s r which measures the strength and direction of a linear relationship between two variables the pearson coefficient uses a mathematical statistics formula to measure how closely the data points combining the two variables with the values of one data series plotted on the x axis and the corresponding values of the other series on the y axis approximate the line of best fit the line of best fit can be determined through regression analysis the pearson coefficient the most common correlation coefficient cannot assess nonlinear associations between variables and or differentiate between dependent and independent variables the further the coefficient is from zero whether it is positive or negative the better the fit and the greater the correlation the values of 1 for a negative correlation and 1 for a positive one describe perfect fits in which all data points align in a straight line indicating that the variables are perfectly correlated in other words the relationship is so predictable that the value of one variable can be determined from the matched value of the other the closer the correlation coefficient is to zero the weaker the correlation until at zero no linear relationship exists at all assessments of correlation strength based on the correlation coefficient value vary by application in physics and chemistry a correlation coefficient should be lower than 0 9 or higher than 0 9 for the correlation to be considered meaningful while in social sciences the threshold could be as high as 0 5 and as low as 0 5 for correlation coefficients derived from sampling the determination of statistical significance depends on the p value which is calculated from the data sample s size as well as the value of the coefficient formula for the correlation coefficientto calculate the pearson correlation start by determining each variable s standard deviation as well as the covariance between them the correlation coefficient is covariance divided by the product of the two variables standard deviations x y cov x y x y where x y pearson product moment correlation coefficient cov x y covariance of variables x and y x standard deviation of x y standard deviation of y begin aligned rho xy frac text cov x y sigma x sigma y textbf where rho xy text pearson product moment correlation coefficient text cov x y text covariance of variables x text and y sigma x text standard deviation of x sigma y text standard deviation of y end aligned xy x y cov x y where xy pearson product moment correlation coefficientcov x y covariance of variables x and y x standard deviation of x y standard deviation of y standard deviation is a measure of the dispersion of data from its average covariance shows whether the two variables tend to move in the same direction while the correlation coefficient measures the strength of that relationship on a normalized scale from 1 to 1 the formula above can be elaborated asr n x y x y n x 2 x 2 n y 2 y 2 where r correlation coefficient n number of observations begin aligned r frac n times sum x y sum x times sum y sqrt n times sum x 2 sum x 2 times n times sum y 2 sum y 2 textbf where r text correlation coefficient n text number of observations end aligned r n x2 x 2 n y2 y 2 n x y x y where r correlation coefficientn number of observations correlation statistics and investingthe correlation coefficient is particularly helpful in assessing and managing investment risks for example modern portfolio theory suggests diversification can reduce the volatility of a portfolio s returns curbing risk the correlation coefficient between historical returns can indicate whether adding an investment to a portfolio will improve its diversification correlation calculations are also a staple of factor investing a strategy for constructing a portfolio based on factors associated with excess returns meanwhile quantitative traders use historical correlations and correlation coefficients to anticipate near term changes in securities prices limitations of the pearson correlation coefficientcorrelation does not imply causation as the saying goes and the pearson coefficient cannot determine whether one of the correlated variables is dependent on the other nor does the correlation coefficient show what proportion of the variation in the dependent variable is attributable to the independent variable that s shown by the coefficient of determination also known as r squared which is simply the correlation coefficient squared the correlation coefficient also does not describe the slope of the line of best fit the slope can be determined with the least squares method in regression analysis the pearson correlation coefficient can t be used to assess nonlinear associations or those arising from sampled data not subject to a normal distribution it can also be distorted by outliers data points far outside the scatterplot of a distribution those relationships can be analyzed using nonparametric methods such as spearman s correlation coefficient the kendall rank correlation coefficient or a polychoric correlation coefficient finding correlation coefficients in excelthere are a few ways to calculate correlation in excel the simplest way is to input two data series in adjacent columns and use the built in correlation formula if you want to create a correlation matrix across a range of data sets excel has a data analysis plugin to use it you must first enable the data analysis toolpak this can be done by clicking on file and then options which should open the excel options dialogue box in the box click on add ins and then on the manage dropdown select excel add ins and click on go this will cause the add ins box to appear check the checkbox for analysis tookpak then click ok the enable process should now be complete to use the data analysis plugin click on the data ribbon and then select data analysis which should open a box in the box click on correlation and then ok the correlation box will now open and you can enter the input ranges either manually or by selecting the relevant cells in this case our columns are titled so we want to check the box labels in first row so excel knows to treat these as titles then you can choose to output on the same sheet or on a new sheet hitting enter will produce the correlation matrix you can add some text and conditional formatting to clean up the result | |
are r and r2 the same | no r and r2 are not the same when analyzing coefficients r represents the value of the pearson correlation coefficient which is used to note strength and direction amongst variables whereas r2 represents the coefficient of determination which determines the strength of a model | |
how do you calculate the correlation coefficient | the correlation coefficient is calculated by determining the covariance of the variables and dividing that number by the product of those variables standard deviations | |
how is the correlation coefficient used in investing | correlation coefficients play a key role in portfolio risk assessments and quantitative trading strategies for example some portfolio managers will monitor the correlation coefficients of their holdings to limit a portfolio s volatility and risk the bottom linethe correlation coefficient describes how one variable moves in relation to another a positive correlation indicates that the two move in the same direction with a value of 1 denoting a perfect positive correlation a value of 1 shows a perfect negative or inverse correlation while 0 means no linear correlation exists | |
what is a correspondent bank | a correspondent bank is a financial institution that provides services to another one usually in another country it acts as an intermediary or agent facilitating wire transfers conducting business transactions accepting deposits and gathering documents on behalf of another bank correspondent banks are most likely to be used by domestic banks to execute transactions that either originate or are completed in other countries domestic banks generally use correspondent banks to gain access to foreign financial markets and to serve international clients without having to open branches abroad 1 | |
how a correspondent bank works | correspondent banks are third party banks they act as middlemen between different financial institutions as such they provide treasury services between sending and receiving banks especially those in different countries services can include correspondent banks may also act as agents to process local transactions for clients when they are traveling abroad at the local level correspondent banks may accept deposits process documentation and serve as funds transfer agents the accounts held between correspondent banks and the banks for which they provide services are referred to as nostro and vostro accounts an account held by one bank for another is referred to by the holding bank as a nostro account or our account on your books the same account is referred to as a vostro account your account but on our books by the counterparty bank generally speaking both banks in a correspondent relationship hold accounts for one another for the purpose of tracking debits and credits between the parties a correspondent bank must act as the middleman when sending and receiving banks don t have agreements in place for wire transfers correspondent banks are a pivotal part of the financial industry as they provide a way for domestic banks to operate when it isn t feasible for them to open branches in a different location especially in another country for instance a small domestic bank with clients in different countries can partner with a correspondent bank to meet the needs of its client internationally doing so also gives it access to the foreign financial market the correspondent bank will therefore charge a fee for this service which is usually passed off from the domestic bank to the customer special considerationsinternational wire transfers often occur between banks that don t have an established financial relationship for example a bank in san francisco that receives instructions to wire funds to a bank in japan can t wire funds directly without a working relationship with the receiving bank most international wire transfers are executed through the society for worldwide interbank financial telecommunication swift network knowing there isn t a working relationship with the destination bank the originating bank can search the swift network for a correspondent bank that has arrangements with both banks upon finding a correspondent bank having arrangements with both sides of the transfer the originating bank sends the transferred funds to its nostro account held at the correspondent bank 2using the example above the correspondent bank deducts its transfer fee usually between 0 and 50 and transfers the funds to the receiving bank in japan in transactions such as this the correspondent bank adds value in two ways correspondent banking poses some risk management challenges because the correspondent bank relies on its customer the respondent bank to perform know your client kyc due diligence on its customers 3reliance on a third party s compliance program rather than conducting kyc on all customers for whom the respondent bank is processing payments through the correspondent bank is why this activity is generally considered to be high risk from a money laundering perspective 4correspondent bank vs intermediary bankalthough there are some similarities between both correspondent and intermediary banks namely that they act as third parties for other banks there is a major difference between the two while correspondent banks normally handle transactions involving multiple currencies an intermediary bank completes transactions involving only a single currency they are especially key for domestic banks that may be too small in size to handle these types of transactions | |
what is a correspondent bank | a correspondent bank is a third party financial institution that acts as a go between for domestic and foreign banks that need to conduct cross border payments with each other | |
what is the difference between a correspondent bank and an intermediary bank | correspondent banks and intermediary banks both serve as third party banks and are used by beneficiary banks or receiving banks to execute international fund transfers and transaction settlements the main variance between correspondent banks and intermediary banks is often the number of currencies in use in a transaction with correspondent banks handling more than one currency and intermediary banks generally working in one currency | |
how does a correspondent bank add value | in transactions that require their use the correspondent bank adds value in two ways it alleviates the need for the domestic bank to establish a physical presence abroad and saves the work of setting up direct arrangements with other financial institutions around the world the bottom linea correspondent bank is an authorized financial institution that provides third party services on behalf of another financial institution that s usually in another country correspondent bank services may include funds transfer settlement check clearing wire transfers and more domestic banks can serve their international clients and gain access to foreign financial markets by using correspondent banks rather than setting up their own branches overseas | |
what is cost accounting | cost accounting is a form of managerial accounting that aims to capture a company s total cost of production by assessing the variable costs of each step of production as well as fixed costs such as a lease expense cost accounting is not gaap compliant and can only be used for internal purposes investopedia theresa chiechiunderstanding cost accountingcost accounting is used by a company s internal management team to identify all variable and fixed costs associated with the production process it will first measure and record these costs individually then compare input costs to output results to aid in measuring financial performance and making future business decisions there are many types of costs involved in cost accounting each performing its own function for the accountant cost accounting vs financial accountingwhile cost accounting is often used by management within a company to aid in decision making financial accounting is what outside investors or creditors typically see financial accounting presents a company s financial position and performance to external sources through financial statements which include information about its revenues expenses assets and liabilities cost accounting can be most beneficial as a tool for management in budgeting and in setting up cost control programs which can improve net margins for the company in the future one key difference between cost accounting and financial accounting is that while in financial accounting the cost is classified depending on the type of transaction cost accounting classifies costs according to the information needs of the management cost accounting because it is used as an internal tool by management does not have to meet any specific standard such as generally accepted accounting principles gaap and as a result varies in use from company to company or department to department cost accounting methods are typically not useful for figuring out tax liabilities which means that cost accounting cannot provide a complete analysis of a company s true costs types of cost accountingstandard costing assigns standard costs rather than actual costs to its cost of goods sold cogs and inventory the standard costs are based on the efficient use of labor and materials to produce the good or service under standard operating conditions and they are essentially the budgeted amount even though standard costs are assigned to the goods the company still has to pay actual costs assessing the difference between the standard efficient cost and the actual cost incurred is called variance analysis if the variance analysis determines that actual costs are higher than expected the variance is unfavorable if it determines the actual costs are lower than expected the variance is favorable two factors can contribute to a favorable or unfavorable variance there is the cost of the input such as the cost of labor and materials this is considered to be a rate variance additionally there is the efficiency or quantity of the input used this is considered to be a volume variance if for example xyz company expected to produce 400 widgets in a period but ended up producing 500 widgets the cost of materials would be higher due to the total quantity produced activity based costing abc identifies overhead costs from each department and assigns them to specific cost objects such as goods or services the abc system of cost accounting is based on activities which refer to any event unit of work or task with a specific goal such as setting up machines for production designing products distributing finished goods or operating machines these activities are also considered to be cost drivers and they are the measures used as the basis for allocating overhead costs traditionally overhead costs are assigned based on one generic measure such as machine hours under abc an activity analysis is performed where appropriate measures are identified as the cost drivers as a result abc tends to be much more accurate and helpful when it comes to managers reviewing the cost and profitability of their company s specific services or products for example cost accountants using abc might pass out a survey to production line employees who will then account for the amount of time they spend on different tasks the costs of these specific activities are only assigned to the goods or services that used the activity this gives management a better idea of where exactly the time and money are being spent to illustrate this assume a company produces both trinkets and widgets the trinkets are very labor intensive and require quite a bit of hands on effort from the production staff the production of widgets is automated and it mostly consists of putting the raw material in a machine and waiting many hours for the finished good it would not make sense to use machine hours to allocate overhead to both items because the trinkets hardly used any machine hours under abc the trinkets are assigned more overhead related to labor and the widgets are assigned more overhead related to machine use the main goal of lean accounting is to improve financial management practices within an organization lean accounting is an extension of the philosophy of lean manufacturing and production which has the stated intention of minimizing waste while optimizing productivity for example if an accounting department is able to cut down on wasted time employees can focus that saved time more productively on value added tasks | |
when using lean accounting traditional costing methods are replaced by value based pricing and lean focused performance measurements financial decision making is based on the impact on the company s total value stream profitability value streams are the profit centers of a company which is any branch or division that directly adds to its bottom line profitability | marginal costing sometimes called cost volume profit analysis is the impact on the cost of a product by adding one additional unit into production it is useful for short term economic decisions marginal costing can help management identify the impact of varying levels of costs and volume on operating profit this type of analysis can be used by management to gain insight into potentially profitable new products sales prices to establish for existing products and the impact of marketing campaigns the break even point which is the production level where total revenue for a product equals total expense is calculated as the total fixed costs of a company divided by its contribution margin the contribution margin calculated as the sales revenue minus variable costs can also be calculated on a per unit basis in order to determine the extent to which a specific product contributes to the overall profit of the company history of cost accountingscholars believe that cost accounting was first developed during the industrial revolution when the emerging economics of industrial supply and demand forced manufacturers to start tracking their fixed and variable expenses in order to optimize their production processes 1cost accounting allowed railroad and steel companies to control costs and become more efficient by the beginning of the 20th century cost accounting had become a widely covered topic in the literature on business management | |
how does cost accounting differ from traditional accounting methods | in contrast to general accounting or financial accounting the cost accounting method is an internally focused firm specific system used to implement cost controls cost accounting can be much more flexible and specific particularly when it comes to the subdivision of costs and inventory valuation cost accounting methods and techniques will vary from firm to firm and can become quite complex | |
why is cost accounting used | cost accounting is helpful because it can identify where a company is spending its money how much it earns and where money is being lost cost accounting aims to report analyze and lead to the improvement of internal cost controls and efficiency even though companies cannot use cost accounting figures in their financial statements or for tax purposes they are crucial for internal controls | |
which types of costs go into cost accounting | these will vary from industry to industry and firm to firm however certain cost categories will typically be included some of which may overlap such as direct costs indirect costs variable costs fixed costs and operating costs | |
what are some advantages of cost accounting | since cost accounting methods are developed by and tailored to a specific firm they are highly customizable and adaptable managers appreciate cost accounting because it can be adapted tinkered with and implemented according to the changing needs of the business unlike the financial accounting standards board fasb driven financial accounting cost accounting need only concern itself with insider eyes and internal purposes management can analyze information based on criteria that it specifically values which guides how prices are set resources are distributed capital is raised and risks are assumed | |
what are some drawbacks of cost accounting | cost accounting systems and the techniques that are used with them can have a high start up cost to develop and implement training accounting staff and managers on esoteric and often complex systems takes time and effort and mistakes may be made early on higher skilled accountants and auditors are likely to charge more for their services when evaluating a cost accounting system than a standardized one like gaap the bottom linecost accounting is an informal set of flexible tools that a company s managers can use to estimate how well the business is running cost accounting looks to assess the different costs of a business and how they impact operations costs efficiency and profits individually assessing a company s cost structure allows management to improve the way it runs its business and therefore improve the value of the firm these are meant to be internal metrics and figures only since they are not gaap compliant cost accounting cannot be used for a company s audited financial statements released to the public | |
what is cost and freight cfr | cost and freight cfr is a legal term used in foreign trade contracts in a contract specifying that a sale is cost and freight the seller is required to arrange for the carriage of goods by sea to a port of destination and provide the buyer with the documents necessary to obtain them from the carrier with a cost and freight sale the seller is not responsible for procuring marine insurance against the risk of loss or damage to the cargo during transit cost and freight is a term used strictly for cargo transported by sea or inland waterways 1cost and freight used to be abbreviated as c f then in 1990 it was changed to cfr by incoterms a set of commercial trade rules established by the international chamber of commerce icc after users complained of difficulties adding the ampersand symbol in telex messages and other technology used in the 1970s and 1980s 23investopedia hilary allisonunderstanding cost and freight cfr contracts involving international transportation often contain abbreviated trade terms that describe matters such as the time and place of delivery payment the conditions under which the risk of loss shifts from the seller to the buyer and specifying the party responsible for the costs of freight and insurance if a buyer and a seller agree to include cost and freight in their transaction the seller must arrange and pay for transporting the cargo to a specified port the seller must deliver the goods clear them for export and load them onto the transport ship the risk of loss or damage transfers to the buyer once the seller loads the items onto the vessel but before the main transportation occurs this provision means that the seller is not responsible for securing insurance for the cargo for loss or damage during transportation 3cost and freight is an international commercial term also called an incoterm to facilitate foreign trade the icc publishes and regularly updates this set of globally recognized terms that help to create a standard for the terms of foreign trade contracts 4 incoterms are intended to prevent confusion by clarifying the obligations of buyers and sellers such as transport and export clearance obligations and the physical point where risk transfers from the seller to the buyer | |
when an incoterm such as cost and freight appears in a contract of sale it creates a legal obligation meaning that it must be respected 5 | similar incoterms to cost and freight cfr for goods transported internationally by sea or inland waterways there are three other incoterms that are closely related to cfr and are frequently used in trade contracts | |
what does cost and freight cfr entail | cost and freight cfr is an expense associated with cargo transported by sea or inland waterways if cfr is included in a transaction the seller must arrange and pay for transporting the cargo to a specified port the seller is also responsible for delivering the goods clearing them for export and loading them onto the transport ship however once the shipment is loaded into the vessel the risk of loss or damage falls to the buyer this means that the seller is not responsible for insuring the cargo during transportation 3 | |
what is an incoterm | incoterm is short for international commercial term a set of terms and definitions published by the international chamber of commerce icc these terms are standardized to prevent confusion and clarify the obligations of buyers and sellers such as transport and export clearance obligations | |
what s the difference between cif and cfr | cost and freight cfr and cost insurance and freight cif are similar they both relate to transporting goods by sea and divide the responsibilities of transit between the buyer and the seller where they differ is that cif requires marine insurance to be included at the expense of the seller with cfr the seller is not responsible for insuring the goods until they reach the destination port 8the bottom linecost and freight cfr an incoterms rule that s applicable only to cargo transported by sea or inland waterways puts a fair bit of responsibility on the shoulders of both the buyer and the seller under these agreements which are fairly common in international trade the seller is responsible for all the planning and costs associated with exporting goods by sea to the destination port specified by the recipient however as soon as the goods are loaded on the vessel the buyer is responsible for providing marine insurance on them and for transporting the goods via truck to their final destination import fees and so on 9 | |
what is cost basis | cost basis is the original value of an asset for tax purposes usually the purchase price adjusted for stock splits dividends and return of capital distributions this value is used to determine the capital gain which is equal to the difference between the asset s cost basis and the current market value the term can also be used to describe the difference between the cash price and the futures price of a given commodity ellen lindner investopediaunderstanding cost basisat the most basic level the cost basis of an investment is the total amount originally invested plus any commissions or fees involved in the purchase this can either be described in terms of the dollar amount of the investment or the effective per share price paid for the investment using the correct cost basis also referred to as the tax basis is important especially if you reinvested dividends and capital gains distributions instead of taking the earnings in cash reinvesting distributions increases the tax basis of your investment which you must account for to report a lower capital gain and therefore pay less tax if you don t use the higher tax basis you could end up paying taxes twice on the reinvested distributions determining the correct cost basis is also the first step when calculating gains and losses after a stock is sold reinvesting dividends increases the cost basis of a stock because dividends are used to buy more shares the average cost basis method is commonly used by investors for mutual fund tax reporting a cost basis method is reported with the brokerage firm where your assets are held many brokerage firms default to the average cost basis method investors can also choose from other methods including first in first out fifo last in first out lifo high cost low cost and more once a cost basis method is determined for a specific mutual fund it must remain in effect brokerage firms will provide investors with appropriate annual tax documentation on mutual fund sales based on their cost basis method elections the concept of cost basis is basically straightforward but it can become complicated in many ways tracking cost basis is required for tax purposes but is also needed to help track and determine investment success the key is to keep good records and simplify the investment strategy where possible example of cost basisfor example if 100 shares of a stock were purchased for 1 000 last year with the first year of dividends amounting to 100 and second year dividends amounting to 200 all of which were reinvested applicable tax law considers these reinvested earnings to be income for tax calculation purposes the adjusted cost basis when the stock is sold will be recorded at 1 300 instead of the original purchase price of 1 000 thus if the sale price is 1 500 the taxable gain would only be 200 1 500 1 300 instead of 500 1 500 1 000 if the cost basis is incorrectly recorded as 1 000 this results in a higher tax liability than would normally be due cost basis comparisonscost basis comparison can be an important consideration assume that an investor made the following consecutive fund purchases in a taxable account 1 500 shares at 20 1 000 shares at 10 and 1 250 shares at 8 the investor s average cost basis is calculated by dividing 50 000 by 3 750 shares the average cost is 13 33 suppose the investor then sells 1 000 shares of the fund at 19 the investor would have a capital gain of 5 670 using the average cost basis method results can vary significantly by cost basis in this case the investor would be better off if they had selected the fifo method or the high cost method to determine the cost basis before selling the shares these methods would result in no tax on a loss of 1 000 with the average cost basis method the investor must pay a capital gains tax on the gain of 5 670 | |
how stock splits affect cost basis | if the company splits its shares this will affect your cost basis per share but not the actual value of the original investment or the current investment continuing with the above example suppose the company issues a 2 1 stock split where one old share gets you two new shares you can calculate your cost basis per share in two ways cost basis of gifted or inherited sharesin the event that the shares were given to you as a gift your cost basis is the cost basis of the original holder who gave you the gift if the shares are trading at a lower price than when the shares were gifted the lower rate is the cost basis if the shares were given to you as an inheritance then the cost basis of the shares for you as the inheritor is the current market price of the shares on the date of the original owner s death many factors will affect your cost basis and eventually your taxes when you decide to sell if your true cost basis is unclear please consult a financial advisor accountant or tax lawyer cost basis and futures contractsregarding futures the cost basis is the difference between a commodity s local spot price and its associated futures price for example if a particular corn futures contract happens to be trading at 3 50 while the current market price of the commodity today is 3 10 there is a 40 cent cost basis if the reverse were true with the future contract trading at 3 10 and the spot price being 3 50 the cost basis would be negative 40 cents as a cost basis can be positive or negative depending on the prices involved the local spot price represents the prevailing price for the underlying asset while the price listed in a futures contract refers to a rate that would be given at a specified point in the future futures prices vary from contract to contract depending on the month when they are set to expire as with other investment mechanisms the spot price fluctuates depending on current local market conditions as the delivery date approaches the price of futures and the spot price shift closer together | |
what is the difference between cost basis and tax basis | cost basis is the original cost of obtaining an asset it can include the purchase price and any fees during the time that an asset is held its value can change due to changes in market value as well as any depreciation the tax basis is the adjusted cost basis of the asset at the time the asset is sold capital gains tax will be charged on the difference between the sale price and the cost basis | |
what is the importance of cost basis | cost basis is important because it is how capital gains taxes are charged if you sell an asset for more than the cost basis you will incur taxes on the profit if you sell an asset for less than the cost basis you will incur a loss and not incur any taxes this loss can also be used to offset taxes on other capital gains | |
how does the irs verify cost basis in real estate | in real estate transactions the internal revenue service irs can verify the cost basis by looking at the closing statement of when the property was purchased or any other legal documents associated with the property such as tax statements the bottom linethe cost basis usually the purchase price of an asset is used to determine how much an investor will pay in capital gains the larger the difference between the cost basis and the sale price if the asset has appreciated the larger the tax bill will be monetarily if there are a lot of aspects to the cost basis such as fees or if the cost basis is adjusted due to dividends or stock splits or if distributions are reinvested then determining the capital gain can be complicated it can be helpful to use a tax advisor in these scenarios | |
what is a cost benefit analysis | a cost benefit analysis cba is a process of comparing the projected costs and benefits of a decision to determine its feasibility businesses can determine whether a decision is worthwhile by summing up the potential rewards expected from an action and subtracting the associated costs consultants or analysts may also create models to assign a dollar value to intangible factors such as the benefits and costs of living in a particular town 1michela buttignol investopediaunderstanding cost benefit analysiscost benefit analysis cba estimates and assesses the value of a project s benefits and costs to determine whether or not its worth pursuing originating from the work of jules dupuit and alfred marshall and developed further by the u s corps of engineers in the 1930s cba involves comparing all current and future monetary costs and benefits of a project 2before taking on a new project prudent managers perform a cba to evaluate all the potential costs and revenues it might generate the analysis s outcome determines whether the project is financially viable or whether a company should consider other alternatives many cba models also factor opportunity cost into the decision making process opportunity cost represents the potential benefits a business misses out on when choosing one alternative over another it accounts for the value of the next best option that isn t selected highlighting the trade offs involved in any decision 3 opportunity cost can make the decision making process more comprehensive and effective finally a manager will quantitatively compare the aggregate costs and benefits to determine if the benefits outweigh the costs if they do the rational decision is to proceed with the project if not the business reviews the project to see if adjustments can be made to increase benefits or decrease costs to make it viable otherwise the project should likely be avoided with cost benefit analysis there are a number of forecasts built into the process and if any of the forecasts are inaccurate the results may be called into question the cost benefit analysis processthere is no single universally accepted method of performing a cost benefit analysis however every process usually has some variation of the following five steps the first step in a cost benefit analysis is understanding the current situation identifying goals and establishing a framework to define the project scope begin by determining the purpose of the cost benefit analysis for example the purpose might be to decide whether to expand to increase market share or to evaluate the benefits of renovating the company website in this initial stage the project planning takes place including setting the timeline identifying necessary resources understanding constraints determining required personnel and selecting evaluation techniques at this point a company should assess whether it s equipped to perform the analysis such as having the technical staff needed for an adequate assessment during the project scope development phase key stakeholders should be identified notified and given a chance to provide their input depending on the findings it may be wise to include those most impacted by the analysis s outcome e g if the outcome is to renovate a company s website it may be required to hire multiple additional staff and should be consulted with the framework behind you it s time to start looking at numbers the second step of a cost benefit analysis is to determine the project costs these costs can be categorized as follows | |
when determining costs consider if they re recurring or one time expenses additionally evaluate whether costs are variable or fixed for fixed costs consider step costs and relevant ranges that could impact those expenses | costs can be financial such as expenses recorded on an income statement or non financial such as negative repercussions on the community every project will have different underlying principles benefits might include the following analysts or project managers should assign a monetary value to all items on the cost benefit list and be careful not to underestimate costs or overestimate benefits a conservative approach that avoids subjective tendencies when calculating estimates is best for assigning value to costs and benefits in a cost benefit analysis analysts should also know the challenges in determining explicit and implicit benefits explicit benefits require future assumptions about market conditions sales volumes customer demand and product expectations implicit costs such as the impact of increased employee satisfaction may be difficult to quantify as there s no straightforward formula to calculate the financial effect of happier workers with the cost and benefit figures in hand it s time to perform the analysis this involves concisely summarizing the costs benefits net impact and how the findings support the original purpose of the analysis however some cost benefit analyses require more detailed examination this may include if a cost benefit analysis is positive the project offers more benefits than costs however a company must consider its limited resources which may force it to make mutually exclusive decisions for example a company with limited capital might find positive cost benefit analyses for upgrading its warehouse website and equipment but it may not have enough funds to pursue all three projects at the same time not all cost benefit analyses that result in net benefit should be accepted for example a company must consider the project s risk alignment with its company image and capital limitations advantages of cost benefit analysisthere are many reasons to perform a cost benefit analysis the technique relies on data driven decision making with recommendations based on quantifiable information specific to a single problem a cost benefit analysis requires substantial research across all costs including unpredictable ones and a thorough understanding of expense types and characteristics this extensive research strengthens the findings and supports strategic planning efforts a cost benefit analysis also requires quantifying non financial metrics such as the financial benefit of increased employee satisfaction although challenging to assess this process forces the analyst to consider aspects of the project that are harder to measure the ultimate goal is to deliver a straightforward report that simplifies decision making limitations of cost benefit analysisan in depth cost benefit analysis may suffice for making a well informed rational decision for projects that involve small to mid level capital expenditures and short to intermediate completion times however for large projects with a long term time horizon a cost benefit analysis might overlook critical factors such as inflation interest rates varying cash flows and the present value of money using net present value npv in project decisions offers the benefit of considering an alternative rate of return that could be earned if the project weren t undertaken a positive npv indicates that the projected earnings exceed the anticipated costs making the project a worthwhile investment while a negative npv suggests the opposite 4however any cost benefit analysis model includes numerous forecasts such as future revenue alternative rates of return expected costs and future cash flows if one or two forecasts are inaccurate the cost benefit analysis results could be questioned highlighting the limitations of this approach requires data driven analysislimits analysis to only the purpose determined in the initial step of the processresults in deeper potentially more reliable findingsdelivers insights to financial and non financial outcomesmay be unnecessary for smaller projectsrequires capital and resources to gather data and make analysisrelies heavily on forecasted figures if any single critical forecast is off estimated findings will likely be wrong | |
what are the five steps of cost benefit analysis | the broad process for a cost benefit analysis is to set the analysis plan determine your costs determine your benefits perform analysis of both costs and benefits and make a final recommendation these steps may vary from one process to another | |
what is the main goal of using a cost benefit analysis | the main goal of cost benefit analysis is to determine whether it is worth undertaking a project or task this decision is made by gathering information on the costs and benefits of that project management leverages the findings of a cost benefit analysis to support whether there are more benefits to a project or if it is more detrimental to a company | |
how do you weigh costs vs benefits | cost benefit analysis is a systematic method for quantifying and then comparing the total costs to the total expected rewards of undertaking a project or making an investment if the benefits greatly outweigh the costs the decision should go ahead otherwise it should probably not cost benefit analysis should also include the opportunity costs of missed or skipped projects | |
what are some tools or methods used in cost benefit analysis | depending on the specific investment or project being evaluated one may need to discount the time value of cash flows using net present value calculations a benefit cost ratio bcr may also be computed to summarize the overall relationship between the relative costs and benefits of a proposed project other tools may include regression modeling valuation and forecasting techniques | |
what are the costs and benefits of doing a cost benefit analysis | the process of doing a cost benefit analysis itself has its own inherent costs and benefits the costs involve the time needed to carefully understand and estimate all of the potential rewards and costs this may also involve money paid to an analyst or consultant to carry out the work one other potential downside is that various estimates and forecasts are required to build the cost benefit analysis and these assumptions may prove to be wrong or even biased the benefits of a cost benefit analysis if done correctly and with accurate assumptions are to provide a good guide for decision making that can be standardized and quantified if the cost benefit analysis of doing a cost benefit analysis is positive you should do it the bottom linesome complex problems require deeper analysis and a company can use cost benefit analysis when it isn t abundantly clear whether or not to pursue an undertaking by determining the expenses and identifying what will be favorable a company can simplify decision making by synthesizing a cost benefit analysis however it s crucial to be aware of the limitations and challenges of cba although it provides a structured method for decision making its accuracy relies heavily on the precision of forecasts and assumptions incorrect estimates of future costs or benefits can result in faulty conclusions despite these challenges when performed with careful consideration and accurate data cba is a valuable tool for strategic planning and resource allocation | |
what is a cost benefit analysis | a cost benefit analysis cba is a process of comparing the projected costs and benefits of a decision to determine its feasibility businesses can determine whether a decision is worthwhile by summing up the potential rewards expected from an action and subtracting the associated costs consultants or analysts may also create models to assign a dollar value to intangible factors such as the benefits and costs of living in a particular town 1michela buttignol investopediaunderstanding cost benefit analysiscost benefit analysis cba estimates and assesses the value of a project s benefits and costs to determine whether or not its worth pursuing originating from the work of jules dupuit and alfred marshall and developed further by the u s corps of engineers in the 1930s cba involves comparing all current and future monetary costs and benefits of a project 2before taking on a new project prudent managers perform a cba to evaluate all the potential costs and revenues it might generate the analysis s outcome determines whether the project is financially viable or whether a company should consider other alternatives many cba models also factor opportunity cost into the decision making process opportunity cost represents the potential benefits a business misses out on when choosing one alternative over another it accounts for the value of the next best option that isn t selected highlighting the trade offs involved in any decision 3 opportunity cost can make the decision making process more comprehensive and effective finally a manager will quantitatively compare the aggregate costs and benefits to determine if the benefits outweigh the costs if they do the rational decision is to proceed with the project if not the business reviews the project to see if adjustments can be made to increase benefits or decrease costs to make it viable otherwise the project should likely be avoided with cost benefit analysis there are a number of forecasts built into the process and if any of the forecasts are inaccurate the results may be called into question the cost benefit analysis processthere is no single universally accepted method of performing a cost benefit analysis however every process usually has some variation of the following five steps the first step in a cost benefit analysis is understanding the current situation identifying goals and establishing a framework to define the project scope begin by determining the purpose of the cost benefit analysis for example the purpose might be to decide whether to expand to increase market share or to evaluate the benefits of renovating the company website in this initial stage the project planning takes place including setting the timeline identifying necessary resources understanding constraints determining required personnel and selecting evaluation techniques at this point a company should assess whether it s equipped to perform the analysis such as having the technical staff needed for an adequate assessment during the project scope development phase key stakeholders should be identified notified and given a chance to provide their input depending on the findings it may be wise to include those most impacted by the analysis s outcome e g if the outcome is to renovate a company s website it may be required to hire multiple additional staff and should be consulted with the framework behind you it s time to start looking at numbers the second step of a cost benefit analysis is to determine the project costs these costs can be categorized as follows | |
when determining costs consider if they re recurring or one time expenses additionally evaluate whether costs are variable or fixed for fixed costs consider step costs and relevant ranges that could impact those expenses | costs can be financial such as expenses recorded on an income statement or non financial such as negative repercussions on the community every project will have different underlying principles benefits might include the following analysts or project managers should assign a monetary value to all items on the cost benefit list and be careful not to underestimate costs or overestimate benefits a conservative approach that avoids subjective tendencies when calculating estimates is best for assigning value to costs and benefits in a cost benefit analysis analysts should also know the challenges in determining explicit and implicit benefits explicit benefits require future assumptions about market conditions sales volumes customer demand and product expectations implicit costs such as the impact of increased employee satisfaction may be difficult to quantify as there s no straightforward formula to calculate the financial effect of happier workers with the cost and benefit figures in hand it s time to perform the analysis this involves concisely summarizing the costs benefits net impact and how the findings support the original purpose of the analysis however some cost benefit analyses require more detailed examination this may include if a cost benefit analysis is positive the project offers more benefits than costs however a company must consider its limited resources which may force it to make mutually exclusive decisions for example a company with limited capital might find positive cost benefit analyses for upgrading its warehouse website and equipment but it may not have enough funds to pursue all three projects at the same time not all cost benefit analyses that result in net benefit should be accepted for example a company must consider the project s risk alignment with its company image and capital limitations advantages of cost benefit analysisthere are many reasons to perform a cost benefit analysis the technique relies on data driven decision making with recommendations based on quantifiable information specific to a single problem a cost benefit analysis requires substantial research across all costs including unpredictable ones and a thorough understanding of expense types and characteristics this extensive research strengthens the findings and supports strategic planning efforts a cost benefit analysis also requires quantifying non financial metrics such as the financial benefit of increased employee satisfaction although challenging to assess this process forces the analyst to consider aspects of the project that are harder to measure the ultimate goal is to deliver a straightforward report that simplifies decision making limitations of cost benefit analysisan in depth cost benefit analysis may suffice for making a well informed rational decision for projects that involve small to mid level capital expenditures and short to intermediate completion times however for large projects with a long term time horizon a cost benefit analysis might overlook critical factors such as inflation interest rates varying cash flows and the present value of money using net present value npv in project decisions offers the benefit of considering an alternative rate of return that could be earned if the project weren t undertaken a positive npv indicates that the projected earnings exceed the anticipated costs making the project a worthwhile investment while a negative npv suggests the opposite 4however any cost benefit analysis model includes numerous forecasts such as future revenue alternative rates of return expected costs and future cash flows if one or two forecasts are inaccurate the cost benefit analysis results could be questioned highlighting the limitations of this approach requires data driven analysislimits analysis to only the purpose determined in the initial step of the processresults in deeper potentially more reliable findingsdelivers insights to financial and non financial outcomesmay be unnecessary for smaller projectsrequires capital and resources to gather data and make analysisrelies heavily on forecasted figures if any single critical forecast is off estimated findings will likely be wrong | |
what are the five steps of cost benefit analysis | the broad process for a cost benefit analysis is to set the analysis plan determine your costs determine your benefits perform analysis of both costs and benefits and make a final recommendation these steps may vary from one process to another | |
what is the main goal of using a cost benefit analysis | the main goal of cost benefit analysis is to determine whether it is worth undertaking a project or task this decision is made by gathering information on the costs and benefits of that project management leverages the findings of a cost benefit analysis to support whether there are more benefits to a project or if it is more detrimental to a company | |
how do you weigh costs vs benefits | cost benefit analysis is a systematic method for quantifying and then comparing the total costs to the total expected rewards of undertaking a project or making an investment if the benefits greatly outweigh the costs the decision should go ahead otherwise it should probably not cost benefit analysis should also include the opportunity costs of missed or skipped projects | |
what are some tools or methods used in cost benefit analysis | depending on the specific investment or project being evaluated one may need to discount the time value of cash flows using net present value calculations a benefit cost ratio bcr may also be computed to summarize the overall relationship between the relative costs and benefits of a proposed project other tools may include regression modeling valuation and forecasting techniques | |
what are the costs and benefits of doing a cost benefit analysis | the process of doing a cost benefit analysis itself has its own inherent costs and benefits the costs involve the time needed to carefully understand and estimate all of the potential rewards and costs this may also involve money paid to an analyst or consultant to carry out the work one other potential downside is that various estimates and forecasts are required to build the cost benefit analysis and these assumptions may prove to be wrong or even biased the benefits of a cost benefit analysis if done correctly and with accurate assumptions are to provide a good guide for decision making that can be standardized and quantified if the cost benefit analysis of doing a cost benefit analysis is positive you should do it the bottom linesome complex problems require deeper analysis and a company can use cost benefit analysis when it isn t abundantly clear whether or not to pursue an undertaking by determining the expenses and identifying what will be favorable a company can simplify decision making by synthesizing a cost benefit analysis however it s crucial to be aware of the limitations and challenges of cba although it provides a structured method for decision making its accuracy relies heavily on the precision of forecasts and assumptions incorrect estimates of future costs or benefits can result in faulty conclusions despite these challenges when performed with careful consideration and accurate data cba is a valuable tool for strategic planning and resource allocation | |
what is cost control | cost control is the practice of identifying and reducing business expenses to increase profits and it starts with the budgeting process a business owner compares the company s actual financial results with the budgeted expectations and if actual costs are higher than planned management has the information it needs to take action as an example a company can obtain bids from different vendors that provide the same product or service which can lower costs cost control is an important factor in maintaining and growing profitability corporate payroll for example is often outsourced because payroll tax laws change constantly and employee turnover requires frequent changes to payroll records a payroll company can calculate the net pay and tax withholdings for each worker which saves the employer time and expense investopedia jiaqi zhouunderstanding cost controlscontrolling costs is one way to plan for a target net income which is computed using the following formula assume for example that a retail clothing shop wants to earn 10 000 in net income from 100 000 in sales for the month to reach the goal management reviews both fixed and variable costs and attempts to reduce the expenses inventory is a variable cost that can be reduced by finding other suppliers that may offer more competitive prices it may take longer to reduce fixed costs such as a lease payment because these costs are usually fixed in a contract reaching a target net income is particularly important for a public company since investors purchase the issuer s common stock based on the expectation of earnings growth over time outsourcing is used frequently to control costs because many businesses find it cheaper to pay a third party to perform a task than to take on the work within the company cost control and variance analysis at worka variance is defined as the difference between budgeted and actual results managers use variance analysis as a tool to identify critical areas that may need change every month a company should perform variance analysis on each revenue and expense account management can address the largest dollar amount variances first since those accounts are most likely to have the biggest impact on company results if for example a toy manufacturer has a 50 000 unfavorable variance in the material expense account the firm should consider obtaining bids from other material suppliers to lower costs and eliminate the variance moving forward some businesses analyze variances and take action on the actual costs that have the largest percentage difference from budgeted costs | |
why is cost control important for businesses | in a competitive marketplace the low cost producers are the ones that can earn the highest profits reducing costs is therefore a key objective for most businesses since it increases both efficiency and profitability | |
what types of costs do businesses incur | in general business costs can be categorized as fixed vs variable and direct vs indirect |
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