Managing Financial Resources

Revenue refers to the money a company obtains from conducting its business. On the other hand, cash describes the ready money that is in hand, bank account or petty cash. Both cash and revenue are used as common variables for assessing the financial strength of business. However, revenue provides an indication of the company’s effectiveness in sales and marketing while cash tends to be an indicator of the effectiveness of money management strategies (Chew and Parkinson, 2013, 24). In accounting, revenue is commonly recorded at the time a transaction takes place and may not necessarily reflect the amount of cash available at hand or bank. Eventually, revenue impacts a company’s cash but does not always have an automatic effect on the amount of cash. In accounting, the concept of equality describes the relationship between variables (William, Shannon, and Maher, 2005, 39). The most important relationship is that between items in a balance sheet, where the equality principle states that the value of assets must be equal to the value of liabilities. Any deviation from the equality indicates possible errors in the accounting entries calculations.
Week 4: Discussion Forum: 4.1
I do not agree with the statement that ratio analysis is limited concerning the amount of information it can reveal about a company’s financial performance. My reason for disagreeing is that financial ratios are a valuable tool that is widely used across industries to judge organizations’ performance regarding management and operations (Tracy, 2004, 61).

These ratios judge how well an organization can utilize its resources and assets to generate income (revenue). Ratio analysis is also used to support decision making by highlighting areas that need corrective action or attention. Investors and creditors frequently rely on results of ratio analysis to determine the liquidity of a company and thus the ability to repay loans (Walgenbach, Norman, and Ernest, 2003, 31). Ratio analysis is also used to facilitate the business’ long-term planning and forecasting needs. Through ratio analysis, the management gets to compare a company’s past performance with the present performance so as to make projections about future performance (Blocher and Juras, 2016, 41). This knowledge is crucial for better and more informed planning for the future. In general, ratio analysis reveals vital information about a company’s financial performance.
Week 5: Discussion forum: 5.3
Opportunity cost describes the cost of the next best option or alternative foregone. Opportunity cost arises due to the scarcity of resources. While human needs are unlimited, there are not enough resources to satisfy them. For this reason, some needs are foregone to meet others. Opportunity cost is a common phenomenon not only among individuals and households but also in business (Birt, Keryn, Suzanne, Albie and Oliver, 2015, 39-52). At any given time, a business may not have enough capital and other resources to invest or spend as circumstances dictate. For this reason, it is common for companies to forego some expenses or investment opportunities. Opportunity cost can have a major effect on the ability of firms to make short-term business decisions (Ehardt and Brigham, 2008, 44). For example, if a company is confronted with two different investment opportunities that will result in short-term gains, the business may decide to forego one opportunity due to lack of investment finances. The foregone investment opportunity constitutes opportunity cost for the business.

Week 6: Discussion forum: 6.2
Cost allocation refers to the process of assigning costs to different cost objects. The objective of cost allocation is to ensure that resources can be used prudently to support a company’s business objectives (Horngren, Srikant, and Rajan, 2003, 11). For this reason, I disagree with the statement completely. As a way to derive maximum benefits from the costs, the allocation should be based on realistic assumptions, calculations, and estimates while taking into account the pertinent requirements of a project or investment. When allocating costs, managers have to identify all services necessary for the operations of a company to run smoothly. Each operation is then allocated its respective costs, which is usually a fraction of the company’s total costs. The result of cost allocation is that crucial information is obtained, which can be used to facilitate decision making. As Berk, DeMarzo and Stangeland (2015, 21) explain, cost allocation can be used to provide managers with crucial information about the cost of the resources used in business and the anticipated returns or revenues.
Week 7: Discussion forum: 7.3
I disagree with the statement completely. Budgeting is an important accounting tool that is used by non-profits to assess their current financial status and plan for the future. For this reasoning, the budgeting process for not-for-profits should be as rigorous as that for commercial entities (Clinton and Merwe, 2006, 63). While many aspects of not-for-profits and commercial entities may be different, there are many similarities. These arise out of the two entities duty to drive scarce resources towards achieving specific objectives. In addition, both not-for-profits and commercial entities are by law required to report on their activities including financial transactions (Kieso, Weygandt, and Warfield, 2007, 12). For such reports to be fair and accurate, they should be based on rigorous budgeting. Another important consideration for not-for-profits pertains to the disclosure of restricted contributions. Regulators and donors will typically require more details regarding a not-for-profit’s use of restricted funds, which in turn calls for rigorous budgeting (Higgs, 2008, 39; Eugene and Brown, 2011, 29). All these considerations mean that not-for-profits need to make elaborate adjustments that will enable them to align their budgeting processes with the applicable rules and regulations.
Week 8: Discussion forum: 8.2
I disagree with the assumption that investors are rational. According to the conventional theories of business finance, investors act rationally and are motivated by the desire to maximize wealth. This view of rationality is not always the case because there are instances when emotional and psychological factors influence investors’ decisions (Jones and Netter, 2008, 19). The behavioral finance theory holds that certain psychological factors such as fear of regrets may override investors’ rationality, thereby forcing them to make investment decisions that are not consistent with the principles of rationality (Baumol and Alan, 2006, 61). Indeed, irrational behaviors lead to investment decisions that investors may not make in other situations. For example, if there are uncertainties about the future of the stock market, investors may tend to hold back their money until they are certain of the market conditions. To a great extent, the perspective of behavioral finance nullifies the efficient market hypothesis because the latter is premised on the rationality of investors (Lo and MacKinlay, 2001, 24). In effect, the efficient market hypothesis holds true only when psychological and emotional factors are held constant.
Week 9: Discussion Forum 9.4
The internal rate of return (IRR) and net present value (NPV) are the most common measures of returns on investment and thus widely used to make capital budgeting decisions. NPV measures the present value of all future cash flows from a business or a project less the present value of all cash outflows (Hartman and Schafrick, 2004, 79). NPV determines the attractiveness of an investment based on the net financial impact on the business. On the other hand, IRR describes a discount rate that makes the net present value equal to zero (Bruce, 2003, 33). As a means to use the IRR approach, a specified minimum rate must be assumed. This rate is then used to assess an investment’s inflows and outflows. IRR and NPV do not always result in the same yields regarding investment decisions. As a matter of rule, IRR will result in a small financial impact and limited returns to a company (Lettau and Sydney, 2003, 619). As such, it is more conventional to use the net present value approach when making investment decisions.
Week 10: Discussion Forum 10.4
The expected return on investment is positively related to the cost of capital. Therefore, investments with high variability (risks) are characterized by high cost of capital (Lundblad, 2007, 123). As such, increased business risks could have an effect on the various costs of capital. This is especially in businesses that have greater risks exposure. According to Strong (2009, 22), increased risks reduce the prospect of returns that investors can receive. With regards to investment decision-making, investors will demand more expected returns when it comes to investing in businesses with greater risks. The high expected return implies increased cost of capital for the firm.

References
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