Cost Cutting Tips for Businesses

An entrepreneur or business owner is always looking to increase profits and bring in more business which can be achieved, among other things, by cutting down on expenses. Here are some cost cutting ideas for businesses that are sure to impact cash flow and increase overall efficiency.

In times of a tough and difficult economy any business owner needs to keep a track on his expenses in spite of results showing strong sales, simply because escalating costs can eat into profits within no time. Much too often business owners grow frustrated with weak sales and rising costs only to make fatal mistakes while cutting costs. Some of these follies are, firing or reducing the sales team, cutting down on the marketing budget or eliminating systems or technology that increase operational efficiency. Now, provided an entrepreneur stays away from such fatal decisions he/she can adopt some of these cost cutting ideas that will surely boost his cash flow and enhance the overall health of the business.

Assess Company Finances
One of the first cost cutting ideas in the office is to prepare a detailed record of the expenses. Prepare a per month or quarterly income and expenses report that will include all details of what are the needs of the enterprise, how much is currently being spent, how much is the budget allocated for every section, and how much can be saved. This will give a general idea as to which all areas should be considered for cost cutting.

Improve Personnel Management
Instead of laying off employees, the management can stop hiring new employees, and utilize the services of the present employees to the fullest. Effective personnel management is the key to cost cutting. Assign tasks to employees who can do their best in those particular tasks. Set targets and ask employees to meet them in the allotted time. Do not deal with consultants, since they have to be paid more as per their level of experience and expertise. If the work to be done is substantial and requires manpower, one can recruit talented and skillful freshers. These freshers in order to gain more experience, will do both quality as well as quantity jobs.

Review Marketing Strategies and Plans
As marketing is a vital part of any business, a lot of finances is spend on it. Get the details of all marketing strategies and programs that are not giving good results. Reinvent those marketing plans and relaunch them in a new and effective manner. If possible, one can even eliminate such ineffective and cost-consuming programs. Instead of spending much on advertising and marketing, one can use the records and clients’ references to draw in more business. Eliminating unnecessary marketing will surely reduce the company costs substantially.

Cut Administrative Expenses
Administrative costs also have a major part in the increase of the enterprise’s operation costs. Instead of purchasing equipment and tools, a better cost control method is to take them on rent. If one wants to buy equipment, getting used but operational ones is a good idea to save on costs. In buying office equipment, opt for good equipment with discount or search for a purchasing partner. Make sure that company employees use the office equipment to its fullest and do not waste any. Ensure that employees do not use office phones for personal purposes. Use electricity only if it is absolutely required. Make sure everything that is purchased is used in the best possible manner.

Learn Waste Management
In any business, service or manufacturing, there is bound to be waste. Waste management can be one of the key contributors to cost reduction. Going paperless can help the firm to save lots of money. For any internal communication, technology can be used. If the firm is a manufacturing unit, all the recyclable production waste should be processed and reused and the rest of the waste should be disposed off properly.

Look for New Business Models
By changing the approach with which one runs the business, cost cutting can be achieved. There are many business models that suit every industry. One has to choose the appropriate business model. However, one also needs to be careful while doing so. If the right decision is not made, things can be worst. Changing the business model is a crucial decision, and the necessary steps should be taken without hastening.

Review the Available Equipment
In all organizations there are excessive equipment like, office tables, chairs, cupboards, desktops, etc., that are either damaged or are not used at all. Such equipment can either be reused or disposed off.

Reassess Vendor Contracts
There are many outsourced functions in every firm and vendors are hired for all such activities. All such contracts should be reviewed. Fresh talks can be initiated with potential vendors and after comparison of the cost incurred, the vendor can be finalized. This activity can help cost reduction in a big way.

Rethink Office Rent/Lease
If the office from which one is operating is leased, then one can look for a cheaper location. Except for service industry like hotels, spas, etc., change in location of the office will not affect the customer base. Instead, there are chances to increase the clients due to relocation.

During financial crisis, one is bound to look for short-term benefits. However, it must be also remembered that the decisions taken at such crucial times can also have a negative effect on the future of the firm. So, one must focus on the long-term benefits before taking any such decision.

These are few cost cutting ideas that can be used in offices and companies to reduce operational costs. Remember that even the smallest possible saving steps taken on the expenses will certainly contribute to the cost cutting measure of the company.

Cost Control Techniques

Cost control techniques can help a company pose good financial results and overcome difficult situations with ease. Read on to know more about the definition and the methods to control cost.

Cost control can help a company determine if it is really spending more than it should. Though it is not essential to be a finance expert to understand the definition of cost control, planning and actually implementing the techniques can be quite a big challenge. The next few paragraphs will give you more information about managing costs.

Techniques and Ways of Controlling Costs

The first step in the management of costs is to find out the cost centers and arrive at a conclusion in how much percentage they differ or vary from the standards of the industry. It is also important to study how the close competitors of your company manage to control their costs, and in turn, maximize their profits. Before discussing the methods, it is very important to carry out a proper cost analysis. The costs incurred by all the departments of the company should be considered, so that you can chalk out smart strategies to overcome these financial problems. It is very important to find out the exact and relevant reasons the costs of the company are more than the standards adhered to by the industry.

The most important of all the cost control techniques is to appoint a small team of highly qualified and experienced people well versed in financial management to manage the daily finances of the company in a professional and systematic manner. The finance team should take correct decisions in favor of the company and opt for less expensive materials and resources for the company without compromising on their quality. You should be very clear about the number of employees you require for a particular project. There are many companies who find it difficult to earn decent profits as their employee count is way beyond the necessity. You can also consider the idea of recruiting employees on a contract basis to cut down your costs. While deciding how much salary to pay to a particular employee, you need to be very careful. You should decide the salary strictly on the basis of overall performance. Instead of giving awards to the employees in the form of frequent salary hikes, you should give out bonuses to eligible employees. Following practices recommended in cost method of accounting may benefit your company.

In the times of recession, many firms resort to cost control techniques such as reducing extra facilities to employees, such as recreational facilities. Such techniques might also include cutting down the expenditure incurred on traveling by air and luxury hotel accommodations in order to harness the cash flow. As a part of cost cutting, few firms may postpone or cancel their plans of acquiring new companies, investing in new businesses, and buying new machinery or systems. These techniques should be utilized to save money and bring back the financial strength of the company.

The cost control techniques used by different organizations are different and are largely dependent on their business model and strength of their balance sheet. The better the implementation of these techniques, the better would be the future of the concerned organizations.

conomic Factors Affecting Business

Both international and domestic businesses are often affected by the dynamic economic conditions prevalent in the market. Factors like demand and supply, interest rates, recession, inflation, etc. often have an impact on the businesses.

Every business has one goal, to maximize its profit. This can be done by analyzing the demand of consumers, providing appropriate supply, along with maintaining quality of goods and services. However, there are many factors that affect this simple operation. Owing to these economic elements, the sales, production, and procurement of a business get adversely impacted.

Economic Factors That Influence Businesses
Demand and Supply
The demand and supply are two principal factors that affect the working of any business model. The demand is the will and ability of consumers to purchase a particular commodity, while supply is the ability of the business to provide for the demand of consumers. Suppose, a mobile phone infused with latest technology is introduced in the market, it will have a higher price because of its demand in the market. Its prices will continue to increase if the supply does not meet the demand.

For instance, in the year 2000, weather played havoc with the sugar crops of Brazil, which is the largest sugar producer in the world. This led to a decrease in the supply of sugar, which in turn resulted in a steep rise in the sugar prices. However, after the initial price rise, the market forces came into play and the demand for sugar became equal to the supplied sugar.

Marginal and Total Utility
Utility is the amount of satisfaction, that is derived by consumers from the consumption of goods. It so happens that after continuous and successive consumption of units of the same goods, the satisfaction that is experienced by a consumer starts decreasing. This often results in short-term or long-term fall in sales. Some organizations prepare for the launch of another brand, before the fall in utility and sales is experienced. The launch of new brand ensures that the revenue trend of the business does not fall. Diminishing utility is among the external factors affecting business.

For example, when we buy a pizza, the first few slices give us immense satisfaction. However, there is a fall in the satisfaction levels, when we are eating the rest. Let’s assume, the marginal utility derived on the consumption of the first slice was 90. However, due to diminishing utility, the second slice had the score of 80 and the third slice was just 70. The satisfaction derived on consumption will be in a decreasing order.

Money and Banking
Banking facilitates monetary and fiscal policies that affect business and also the customers of the business. Money in circulation dictates the purchasing power or rather the demand of the consumers. On the other hand, the banking facility dictates the borrowing capacity of individuals as well as the business. The banking policies play a decisive role in affecting the prices of goods and interest rates along with investment and asset prices. The monetary polices of countries also influence the economic activities and inflation. This whole dynamic process is also known as monetary policy transmission mechanism.

Economic Growth and Development
Economic growth dictates the amount of finances that the society at large is earning and development indicates the volume of money that is being invested into channels of long-term upgradation. Among all the economic factors, development is the most important one, as a business has to cater to the demands of an economically dynamic society. For example, the luxury brands perform well during an economic upturn, much more than the companies which produce essential offerings.

Income and Employment
Other important aspects of the economy that affects a business operation, are the employment density and rate of income. The per capita income and density of employment determines the rate of demand, density of demand, and also the purchasing power of the people. For example, during an economic upturn, there are employment opportunities which generate income that enables people to possess a stronger purchasing power. On the contrary, as the employment density and income rate go down during recession period, the purchasing power of the people also diminishes.

General Price Level
Another very important aspect of the economy that plays a part in the growth of business is the general price levels of commodities. Costs of raw materials, paying power of people, cost of production, and cost of transportation are some of the most important components that determine the general price levels and in turn, lower the profit margin of a business.

For example, an increase in the price will reduce the total revenue generated as there might be a dip in the demand. Let us assume that we have bought 16 pizzas for the price of $4. However, after an increase in the price of pizzas, we may get to buy only 8 pizzas even after shelling out $6.

Trade Cycles
A trade cycle plays a part in fluctuating the costs of goods and commodities in an economy. Prosperity, recession, depression, and recovery are the phases of a business cycle that affect the demand and supply of all goods. Also, trade cycles often affect the general price levels of essential and non-essential commodities.

Inflation
Inflation is a phenomenon that occurs when there is too much supply of money in the economy that is not supported by the output of goods and services. As there is a lot of money floating around, the prices of goods also increase in order to sustain the businesses, resulting in the increase of costs of raw materials which are needed for production. A hike in the prices of raw materials, thus, also increases the cost of a product.

In simple words, the buying capacity of people decreases, when their incomes remain constant but the prices of products and services increase. This affects the demand for the goods. For example, in 2008, Zimbabwe faced the worst case of inflation, which proved disastrous for its economy and led to the abandonment of its currency.

Recession
During recession, companies face a decrease in sales revenues and profits. To curtail cost, they resort to cutting back on hiring new employees, making capital expenditure, marketing and advertising expenditures, research and development activities, etc. This not only affects large organizations, but also the small ones which act as vendors to these big companies.

Smaller organizations may find it difficult to survive in recession due to lack of financial funds or availability of loans. Also, people may shift their preferences to slightly affordable products during recession or may not spend on luxury items at all. This will also have a negative impact on the demand for these products. Factors like falling stocks, lack of dividends, below par quality, employee lay-offs, bankruptcy, etc. during recession may also affect the business adversely. For example, in 2007, when the banking industry was unable to face the meltdown of the mortgage market, it inadvertently led to a free fall of the stock market and a decrease in consumer spending. It also set into motion a chain of events that resulted into a global recession within a year.

Exchange Rate
When a company buys certain goods from a US-based organization, it will have to convert its currency into US dollars for making the payment. If the currency of the buyer is stronger than the US dollar, it will be beneficial for the company. However, if it is weak, the company will have to shell out more money. This was an example of an export business. A similar logic will also be applicable to the import business. Moreover, price competition in the international market often leads to fluctuating prices. This is because a foreign company in the US market may increase or decrease its prices depending on the changes in the exchange rate.

Suppose some time ago, 1 pound was 1.5 US$. However, today, it may decrease to 1.3 US$ if the value of dollar appreciates. This will cause the imported goods from UK to become cheaper for the consumers in the US. However, this will not be a good news for US exporters as UK consumers will find that they are getting lesser returns for a pound’s worth.

Rate of Interest
The rate of interest has a direct impact on the loans that business take to sustain or propel their growth. The higher the interest rates, businesses find it difficult to commit to projects that require investment. On the contrary, lower rates make it easier for people to borrow money in order to buy cars and houses. Low loan rates also provide an opportunity to people to spend more on other things, thus creating a demand for various goods and services, and thereby spurring the growth of economy.

Government Regulations
There are several government agencies that regulate businesses for the safety of humans, animals, and environment. Some industries are heavily regulated and introduction of new laws discourage uncontrolled growth of factories and plants. For example, a coal-powered power plant may be asked to be shut down because of an environmental threat it poses. This may affect a business drastically.

Every changing factors in an economy affect the working of businesses. Hence, companies need to have a foolproof strategy and contingency revenue reserves to cope with such dynamic changes. It is best to take calculated risks and expand a business when the rates of interest are low and the demand is high.

Top Management Consulting

Management consulting is a sought-after, high rewarding field of work for many. The profile of a management consultant is considered among the highest paying jobs. It is a job that demands filling up technical gaps that exist in an organization to improve its productivity and efficiency. The management concepts are the cornerstones of these firms. Firms hiring such consultants are many, but the ones that top the list are only a few. Getting there takes a great deal of effort, which includes formal training and a good work experience. Consulting firms are breeding grounds of the best intellectual, analytical, and creative minds in the present day’s highly competitive and fast-paced corporate scenario. Here’s taking a look at list top firms with a brief overview.

Accenture
Leading the list is Accenture, the world’s largest, and the most famous. It is considered to be a leader in the areas of systems integration and business process engineering. The company has presence in over 80 countries around the globe. Accenture is a spin off, of Arthur Andersen Consulting, a famous firm in its own right. Accenture grew bigger in terms of revenues and presence than Arthur Andersen by 2001.

McKinsey
Closely following is McKinsey. This is a privately owned management consulting firm with more 80 offices around the globe and odd 15,600 employees. This firm also finds itself in the top financial consulting firms. McKinsey has divided its work in 7 broad verticals, each having its own specialist skilled consultants to provide thoughtful, in-depth solutions to any problems the client might be facing. McKinsey’s clients range from nearly every sector and from every country, from automotive giants in U.S. to some government department or NGOs in India.

Deloitte Consulting
Consulting arm of Deloitte & Touche, Deloitte Consulting has a workforce of 15,000 professionals spanning over 33 countries. The impressive list of clients comprises more than one-third of companies in Global Fortune 500 list. It’s services includes consulting for tax advisory and financial advisory services, strategic and operational management consulting. Managing consulting verticals also include strategy and operations management, technology/systems integration and human capital. The main targets of this consulting firm are public sector, real estate, life sciences and health care, consumer business, financial services, manufacturing, technology, media, and communications, energy and resources, aviation and transport.

Boston Consulting Group (BCG)
Privately held management consulting company, Boston Consulting Group (BCG) was established in 1968 by Bruce Henderson. Their major claims to fame have been contributions to management theories and practices, like the BCG Matrix for example. With 6,000 employees spread over 65 offices, this is one of the top most firms, as none can match their high quality strategic consulting work. For those seeking high management consulting salaries, this is the place to be. This intellectually driven company has an insightful and out-of-the-box solutions for its esteemed list of clients.

Bain and Company
Focus of Bain and Company is at developing and increasing operational efficiency and developing marketing strategies. Bain is also heavily involved in consulting in financial domains like mergers and acquisitions, private equity investments and transformation plans. Bain has over 4,000 professionals and shares a close affiliation with Bain Capital, an elite private equity firm, known for outstanding large investments.

Booz & Company
The oldest management consulting firm Booz & Company, was founded in 1914, and was the first one ever to coin the term “management consultant”. It provides consulting for both public and private sectors. The company employs more than 3200 people operating in 57 offices in 33 countries. Booz Allen Hamilton, is Booz’s venture which only provides consulting services to the U.S. Government.

PricewaterhouseCoopers LLP (PwC)
PricewaterhouseCoopers LLP (PwC) is one of the world’s largest providers of assurance, tax, and business consulting services. With 757 cities across 154 countries and employs over 161,000 people the company posted a profit of $26.6 billion in 2010. It is the largest provider of management consulting jobs related to accountancy. This is the reason why PwC hired a number of CFAs, CAs, and lawyers.

Profits posted, businesses acquired, and returns yielded on investments decides the management consulting firms’ ranking. Such consulting firms usually work on a hybrid model of pricing. Traditionally the firms billed the clients solely on the basis of time and material. In this model, the consultant’s man hours and other out of pocket expenses or overheads were charged to the client. By the mid 2000s there was a dramatic shift towards a more result oriented approach to pricing, and the two models have been combined and adopted by major firms to charge their clients.

World over there are many management consulting firms that deliver services in various areas of management and operations. Mainly we can define seven broad areas of management services that these firms cater to, namely, business technology, corporate finance, marketing and sales, operations, organization, risk, and strategy. Today many non-consulting companies and IT companies are making great strides in the world of consulting too.

Tips to Become a Finance Director

Finance director is a senior level position in the company management and is considered as one of the most respectable jobs in the world of banking and finance. This article will try to explain how to become a finance director.

The finance department is one of the most important departments in any type of organization. This department has to handle financial transactions of the firm and plan on investments and raising of funds for funding ongoing projects. As no project can be completed without money, the job of a finance director assumes further importance. Finance directors work in the areas like resource management, strategic planning, preparation of a financial budget for the financial year, supervising company’s financial performance and preparing financial reports for outside agencies like creditors and shareholders. Ensuring that the firm’s asset quality is high and debt levels are comfortable, are also some of the responsibilities of this job. Being the leading person in the department of finance, the finance director has to form teams, assign work and help in planning as and when they need. In short, the ultimate aim is to make sure that the firm achieves its financial goals or objectives in a planned way.

High School Preparation
Sincere efforts taken during this stage of one’s educational career pays off greatly. So, take special effort on subjects like economics, finance, mathematics, English and computer science while you are in high school. Get excellent grades so that you are not denied admission to top business schools to get deeper knowledge of finance.

Get Your Graduation Degree
Getting a graduation degree in accounting or finance is essential to pursue this profession. If you look at the track record of the Chief Financial Officers (CFO’s) of top companies, you will find that all of them have passed from top business schools. So, you need to try to do your MBA in accounting or finance from the top business schools in the US. As a student of finance, you should have ability in the following areas:

Financial management
Managerial economics
Management accounting
Costing and budgeting
Preparation and analysis of financial statements
Mergers and acquisitions
Fundraising through different routes

During the course of your study, you will be taught these subjects by expert faculties, hard work and passion for knowledge can lay a strong foundation for a successful career in finance.

Intern at a Major Finance Firm
During the business management course, students have to do their summer internships in financial and banking giants. Here, they get practical work experience and can apply their classroom knowledge. You will need to have good educational record to get internship at top firms in investment banking and asset management. A successful internship can help you get final placement in a top firm after you compete your course.

Become Auditor/Accountant/Finance Associate
After you complete your university education, you need to work as an auditor/accountant (junior level) initially for a few years. Then, with proven ability, you can become senior accountant or senior business analyst.

Become Assistant Finance Controller
Becoming assistant financial controller/assistant manager would be your next target after gaining experience in accountancy and auditing. By working at a managerial position, you will be able to sharpen your business skills and prepare yourself for future challenges. It would take around five years to become assistant finance controller.

Enter the Senior Management
To become a finance director, you first need to enter the senior management of the company. This is possible after gaining around ten years of experience in the field of finance. As a senior management professional, you will be involved in strategic planning, decision-making, chalking out expansion plans and fundraising. After spending some five to ten yeas in senior management position, you can then be eligible for this position.

The salary in this field can be between $120,000 to $300,000 or even more. By following the above step and taking keen efforts, you will be able to secure your career in the future.

Crowding Out Effect in Economics

During the great recession of 2007, government deficits had increased a lot, since the government had to incur huge public spending for the masses. However, the ultimate result was that it did impact the business sector, and they ended up being crowded out. Thus, government spending does have a negative side too, though it has been overlooked.

The dictionary meaning of the term ‘crowding out’ is thrusting out, or forcing out of a small place. However, in economics, the crowding out effect is an interesting phenomenon that deals with the government spending. Government deficit is a situation when the government ends up spending more than the borrowing. What does the government do when it is short of money? Simply mint money? Of course, not! Money circulation is not so easy, and the government cannot start printing money simply as per its wishes and whims. Too much circulation of money will not lead to an increase in the value of the goods or services, but will certainly increase the inflation rate in the economy.

Why does ‘Crowding Out’ occur?

To reduce the deficits, the government again borrows from the market. Since the fiscal policies of the government impact the economy on a much larger scale, it does affect the private sector of the market. Due to the increase in government borrowing, the demand for investments in the market increases. Automatically, the price of funds increases. It implies that this increases the rate of interest in the market.
Hence, increased interest rates in the market again have an impact on the private sector. The private entrepreneurs cannot borrow much, once the interest rate of loan funds increases. In this case, they may stop or curb their growth or expansion plans. Thus, the government sucks up or absorbs the money circulation in the market, thereby creating a crowding out effect in the market.

Interest rates and borrowings have an inverse relationship. Once the interest rates increase, the borrowings decrease and vice versa. The government can create a crowding out effect in many ways.

Issuing government bonds in the market

The government borrows from the market, by issuing bonds and securities. Other than that, there are compulsory savings in the form of pension funds and other security benefits. When such bonds are circulated in the market, people tend to invest in them due to their high credit rating as compared to the private sector. Thus, much also depends on the mentality of the investors. If they prefer to have risk-less investments, most of them will divert their savings to the government.

Increase in public sector spending
Consider that the government spends on donating to a public institutional store. The goods are available at rationed and subsidized prices in that store due to benefits given by the government. Thus, customers will prefer to buy goods from the store rather than buying from private local stores. Thus, indirectly, public spending leads to losses for private individuals in the market.

Increase in tax rates
When taxes rise, the savings of individuals in the market reduce, and hence, there is less money in the market to invest. Thus, the money is diverted to the government’s funds, which they use for public spending. However, due to this the private entrepreneurs are at a loss, since, when supply is lesser than the demand, prices will ultimately increase. Thus, it withdraws money out from the private market’s pocket to the treasury of the government. Studies have also shown, that once taxes increase, private individuals tend to make less donations, since they have less savings and there are public contributions made by the government too.

Impact of the increase in government borrowing on the economy

The crowding out effect might not be too tough in the market, and may not impact the economy much. However, much depends on the economic conditions during that time. Thus, if it is coupled with an increase in the savings of the individuals in the economy, its impact might be washed away. If the increase in borrowing by the government is not too aggressive, and the economic conditions in the market are conducive, it might have a very subtle impact on the borrowings of the private sector. Much depends on the interest rates rather than the increase in government expenditure.

Thus, it can be said that increased government spending has its own set of pros and cons. Though the government spends on public welfare, the private sector does suffer in this bargain. Of course, its impact might not be that harmful to the economy and is influenced by many other economic factors such as investor’s psychology, technology, international trade, etc.

Prepare a Methodical Cost Sheet

There may be many questions in the minds of many businessmen who have their own factories, prominent among them being, how to prepare a cost sheet. Well, this article will tell you all about it.

Running a business successfully requires a lot of financial planning and effective financial management. A cost sheet can be a way of being aware of all the costs incurred by us on different things while running a factory or facility. From this knowledge, we can easily think of cost cutting ideas for companies and institutions. So, you must have some idea as to why the preparation of a cost sheet is essential. The format is standard and we are expected to follow it. In this article, you will learn how to prepare a cost sheet.

Factors to be Considered

Calculation of Materials Consumed

The aim of preparing a cost sheet is to show the various types of costs incurred by the factory in the course of its operations. This document consists of particulars and amount columns. In the particular columns, you show the different kinds of expenses of the company. Calculating the materials consumed is the first step. The materials consumed are calculated by adding the purchased raw material cost and carriage inward to the opening stock of raw materials, and then subtracting the closing stock of raw materials from this total.

Materials Consumed = (Opening stock of raw materials + purchase of raw material + carriage inward) – (closing stock of raw material).

Calculation of Prime Cost

Prime cost is calculated by adding direct wages and direct expenses to the materials consumed total. Direct wages are the wages given to workers in the factory and direct expenses are the expenses incurred while making the finished goods.

Prime Cost = Materials consumed + direct wages + direct expenses.

Calculation of Factory cost

The next step is the calculation of factory cost. The factory cost is calculated by adding the factory overheads to the prime cost. The factory overheads are the expenses related to the factory and are in no way related to administration and marketing expenses. These factory overheads can include lighting costs, salaries for workers, machinery cost, rent for factory, insurance for factory, power costs, fuel cost, etc. Overhead is actually the sum total of indirect material, indirect wages, and indirect expenses.

Factory Cost = Prime cost + sum of all factory overheads.

Calculation of Cost of Production

The cost of production can be calculated by adding the office and administration overheads to the factory cost. Now, the office and administration overheads are the salaries of managers, director’s fees, office light expenses, stationery expenses, building maintenance expenses, etc.

Cost of Production = Factory cost + office and administration overheads.

Once this cost of production is calculated, you need to add the opening stock of finished goods and then subtract the closing stock of finished goods before we calculate the cost of sales.

Calculation of Cost of Sales or Total Cost

The total cost can be calculated by adding the selling and distribution overheads to the cost of production. These selling and distribution overheads are mainly the expenses on promotion and marketing related activities. These can include postage expenses, transportation expenses, advertising expenses, marketing expenses, and carriage outward.

Total Cost = Cost of production + selling and distribution overheads.

Calculation of Total Sales

The total sales can be calculated by adding the total cost and the net profit of the firm. This is the last part of the cost sheet.

Total Sales = Total cost + net profit.

This explanation on how to prepare a cost sheet gave us knowledge of all items of cost sheets and how they are used to calculate the total cost. Only monetary aspects are considered in the preparation. So, try preparing the same yourself and test your accounting knowledge and skills.

Understanding Different Types of Savings Accounts

If you are looking for information on the types of savings accounts offered by banks in the US, this article will be a helpful read. By the time you are through with this write-up, you’ll know which type of savings account will be ideally suited for your requirements.

Banks as financial institutions have been around since ever and the primary service they have provided over the years, besides lending money is the management of savings accounts for their customers. The capital base of a bank is strengthened by the amount of deposits that its customers invest in it. These deposits mainly come in the form of savings accounts. In this Buzzle article, you’ll be introduced to the different types of savings accounts that you could open with banks in USA. Before we dive into all that, let me define what are savings accounts and how they serve the interests of account holders and the banks offering them.

What is a Savings Account?
A savings account is created through a contractual agreement of a customer with a bank or credit union, whereby, the financial institution offers an interest on the money deposited, along with other services. Depending on the nature of the account, there may or may not be a restriction on the minimum balance that needs to be maintained by an account holder. The interest offered is of a compounding nature, being fractionally deposited to the account over time.

Again depending on the nature of the account, there may be restrictions on the number of free cash withdrawals per month. A checkbook usage facility is also an optional feature that you may not find with all savings accounts. When there is no limit on minimal balance requirements, the interest rate offered by the bank is low. On the other hand, savings accounts with high interest rates require that you strictly maintain a minimum balance. Most savings accounts come with a debit card, that lets you withdraw money in cash from automatic teller machines (ATMs). Obviously, there is no limit on the number of deposits you may make in the account. Only withdrawals beyond a limit, may be charged. Majority of savings account deposits are protected by the FDIC (Federal Deposit Insurance Corporation), a federal government body, which was created for the purpose of safeguarding deposits of the US citizens.

Understanding Different Types of Savings Accounts
Although the range of services offered along with the account may vary from bank to bank, the three primary kinds of savings accounts offered by banks are the following.

Basic Savings Account
Also known as regular savings accounts or passbook accounts, these come with no limit on the number of withdrawals per month. Geared to be used for regular expenses, these accounts come with a low minimum balance demand. Some are even deemed to be zero balance accounts with no minimum balance requirement whatsoever. They are equipped with a debit card and checkbook facility. Interest rates offered on the deposit are quite low with most being less than 1%.

Money Market Account
Offering a higher interest rate, money market accounts come with a substantial amount of restrictions. The minimum balance expected to be maintained in such an account is substantially high, compared to basic accounts, due to the high promised interest rate. Only a fixed number of withdrawals are allowed for free, after which they are charged. The banks offering such accounts primarily invest in securities and promise high returns.

Certificate of Deposit Account
A third option is a certificate of deposit account, which locks in the account holder’s deposit for a fixed period of time, after which it’s returned with interest. These accounts offer the highest interest rates and penalize all withdrawals that are made before the maturity of the certificate of deposit. It is a classic time deposit with lock in periods ranging from 1 month to more than 5 years.

If you are looking for an expense account that you plan to use for shopping, paying your bills and handling other such expenses, a basic savings account is what you are looking for. In case you are looking for a bank account that earns you a decent interest rate and you don’t intent to use it as an expense account for regular transactions, a money market account is what you need. If you are looking for still higher returns, a certificate of deposit account is the ideal choice. Evaluate your exact requirements and choose the option which is most conducive for your plans.

Stages of a Business Cycle

Like everything in this world, business too has to follow a life cycle. Time happens to be one of the major factors that plays an important role in the life cycle of a business.

With the passage of time, a business enters into different phases of its life. Along with time, other factors too play an important role in the life cycle of a business. A major concern for companies is to stay in the market, create business opportunities, and survive threats from competitors. To capture the market, a business has to go through rigorous courses and policies that help it to gain popularity. With the introduction of a business in the market, it becomes essential to implement proper planning for its growth and development.
The Business Cycle
Every business has its own set of guidelines and processes designed for its efficient functioning. However, in general, any business is affected by various factors like demand and supply, consumer confidence, availability of capital, etc. These factors affect the business in such a way that it experiences a periodic rise and fall. There are basically four different phases in the life cycle of any business, which are:

Growth
» This is the initial phase that a business experiences in the market. Many policies have to be framed in this phase. It is also referred to as the expansion phase, as the business tries to establish its niche in the market. It happens to be the time when business owners start establishing their brand identity and generate brand loyalty within their customer base using intelligent marketing practices.

» This stage is marked by a rise in consumer demand and a consequent requirement of increased inputs in terms of production, manufacturing, and general operations to keep up with the rising sales and continued growth. The growth phase, being marked by increased sales, shows a rise in profit margins and firmly establishes the brand name of the business in the market.

» The company has to work on its strength and look out for the potential threat of competitors. The focus of this stage is to maintain the core customer group and build trust and goodwill amongst the customers.

A few common features of this phase include:
– Increasing demand
– Increased income
– High competition
– High advertising
– New policies
– Creation of customer loyalty

Peak
» After the introductory phase of the business gets over, it enters its second crucial juncture, the ‘peak’ phase. In this stage, a business reaches its maturity point and is well established in the market. Sales reach their apex and not much effort is required to increase turnover. The brand identity and brand image of the business are well established at this stage. The customer base, investors, and other important business networks are well laid at this point.

» However, intensive marketing is a must to enhance the overall market position, or at least maintain the current market position. This is the phase where the company would want to branch out into other ventures and dabble with product innovation. This is the business stage where the profit margins are fairly stable.

Some prominent features of this phase include:
– High demand
– High supply
– High income
– High market share
– Less advertising
– Strong brand image

Recession
» After enjoying maturity for sometime, there comes a phase when the market sales of a business decline. There can be a lot of factors responsible for the degradation of the business. It can be government policies, new strong competitors, labor problems or any other unfavorable condition that can bring about a drastic change in the economic stability of the business.

» Recession becomes a stage where the company struggles to keep its stand in the market. This stage shows a loss in market share and the business is said to be in a ‘phase of recession’.

Related features of this stage are:
– Decrease in demand
– Loss in sales
– Low income
– Loss of market share
– High competition

Trough
» In a business cycle, the trough stage is exactly opposite of the peak stage. In this stage, the business reaches its lowest point in terms of market share and sales. During a trough stage, prices and profits start falling. There is less selling, buying, employment and production. In this stage, consumer demand and confidence level remain low. High competition in the market leads to the downfall of business. If the trough phase becomes severe then it is known as depression.

Common related features include:
– Lowest income
– Loss in customer confidence
– High unemployment
– Cost cutting and reduction
– Fall in market share

The last phase (Trough) seems like a vivid description of the end of a business. But this may not happen in most cases, as businesses often frame new policies and start expansion policies to enhance growth. When businesses frame such policies, this stage becomes the recovery stage, which, if successful, takes the company back to the growth stage, thus completing the cycle. Proper planning and decision-making is essential to make the business prosper again.

These four stages of a business cycle are experienced by every business, big or small, though not necessarily in the same order. Sometimes the business flourishes and gains maximum profits, while at times the business is on the verge of a complete meltdown. It is the attitude and the positive perspective of successful businessmen that keeps every business going through the ups and downs, yet always aiming for the pinnacle of success.

Basic Accounting Concepts

Accounting refers to the systematic recording of business transactions and preparation of statements relating to assets, liabilities and functioning results of a business. Accounting has to follow certain fundamental rules that form the basic accounting concepts and principles.

The main purpose of financial accounting is to provide necessary economic information required for decision-making in a business. Financial accounting follows certain rules and guidelines to prepare reports on the financial standing of an entity. These rules and guidelines are usually referred to as Generally Accepted Accounting Principles (GAAP). GAAP sets its accounting standards and guidelines for preparing financial reports for public, private, non-profitable organizations, and government-owned companies.

Readers of a financial report should be intimated if the information provided in the financial statements follow the GAAP guidelines. The accountant or auditor is responsible for ensuring this procedure.

Fundamental Concepts of Accounting

Business Entity
This principle treats the company as a separate entity from its owners. Personal accounts of owners/partners should be kept separate from profits and expenses of the company. So, the accounting reports are prepared from the viewpoint of business purposes and not from the owner’s outlook.

Cost
This principle states that the company has to consider the original cost of fixed assets like building and machinery, rather than market value. But today, most of the companies report only the market value.

Sincerity
According to this principle, the auditors should prepare the financial reports in order to project the real financial position of the company rather than fabricating facts.

Monetary Unit
This principle assumes that transactions should be recorded in a single currency and exchange rate. This will help the company compare its accounts to the previous years, in spite of a change in the rate of inflation. This principle actually supports the preparation of business reports in a uniform manner.

Consistency
According to this principle, the accountants should use the same methods and functions for different periods of time. For example, the same rate of percentage should be applied for all depreciation. This principle is also known as the principle of regularity.

Prudence
The main objective of this principle is to show the real financial position of the company. The accountants should show the correct revenue accounts and provide a provision for expenses, which may occur in the future.

Matching
According to this principle, all the revenues and concerned expenses incurred should be shown in the same financial period. The main objective is to avoid any overstatements of income at any particular time.

Accrual
This principle requires the company to record the revenue or income when it is actually earned.
Continuity or Going Concern
This principle presumes that the functioning of the company will be smooth and the business entity will continue to operate for a fairly long period. This principle mainly helps in preparing financial statements of the company as well as ensures that investors will get revenue on their investments.

Realization
This concept indicates the actual amount of revenue or cash inflows earned and realized from a business transaction. It means that realization occurs at the time of receiving the cash in the exchange of goods and services, and not at the time when the contract is granted.
Time Period
This principle specifies a particular interval of time for which the financial reports are prepared. It can be either year, fiscal year or short period like a quarter or a month.

Full Disclosure/Materiality
This principle states that the full disclosure of information and events should be ensured. The financial reports should not mislead the investors and should provide clear details of the financial position of the business.

Dual Aspect
According to this principle, all financial transitions have two effects. This concept, which is the cornerstone of accounting principles, assumes that making a record of transactions in the books of accounts has a dual outcome. For instance, getting goods for some amount of money has two effects: (1) paying cash and (2) receiving goods. A record of both should be made into the books of accounts. The dual aspect concept is expressed by the following equation:

Assets = Liabilities + Equity

Assets are owned by a business, and liabilities are the debts of a business, that the company owes to its creditors. Equity is what the company owes to its owners. So all transactions must comply to the above equation.
Due to these guidelines of GAAP, consistency in the methods of preparations of financial accounts of the companies has been maintained. These principles are directly proportional to the complexity of the accounts of a business and may hence, seem complex. The continuing complexity of business transactions has made it necessary for the accounts sector to have some standardization. GAAPs have not only set the benchmark for standardization, but have also ensured that the general public has a clearer view of the financial stability of a company.