Cash Flow Management

How do small firms choose their capital structure? When is it appropriate for a small business to fund its operations with borrowed funds? What is the nature and function of effective leverage in financial management? These questions relate to the optimal capital structure of a business enterprise-the appropriate mix of debt and equity that maximizes the return on investment and shareholders’ wealth while minimizing the cost of capital, simultaneously. Clearly, effective leverage is vital to a sound business strategy designed to maximize the wealth producing capacity of the enterprise. In these series on effective financial management, we will focus on the pertinent financing strategic questions and provide some guidance. The overriding purpose of this article is to highlight some basic financial theory and industry practice in effective financial leverage. For specific financial management strategies please consult a competent professional.

Please note that the appropriate amount of financial leverage for each firm differs markedly based on the overall industry dynamics, market structure-level of competition, stage of industry life cycle, and its market competitive position. Indeed, as with most market indicators firm-specific leverage position is insightful only in reference to the industry expected value (average) and generally accepted industry benchmarks and best practices.

Types of Leverage:

Financial Leverage: Degree of financial leverage is the ratio of the EBIT/EBT-earnings before interest and taxes divided by earnings before taxes. When a business relies on borrowed funds for its operations-the financial leverage is created as the business incurs fixed financial obligations or interests on the borrowed funds. A given percentage change in the firm’s operating income (EBIT) produces a larger percentage change in the firm’s net income (NI) and earnings per share. Indeed, a small percentage change in operating income (EBIT) is magnified into a larger percentage reduction in net income. The degree of financial leverage (DFL) measures a firm’s exposure to financial risk or the sensitivity of earnings per share (EPS) to changes in EBIT. Therefore, DFL indicates the percentage change in earnings per share (EPS) emanating from a unit percent change in earnings before interest and taxes (EBIT). In general, a firm’s short-term financing needs are influenced by current sales growth and how effectively and efficiently the firm manages its net working capital-current assets minus current liabilities. Note that ongoing short-term financing needs may reflect a need for permanent long-term financing including an evaluation of the appropriate mix and use of debt and equity-the capital structure.

Operating Leverage: Fixed operating costs, such as general administrative overhead expenses, contractual employees’ salaries, and mortgage or lease payments create operating leverage and tend to elevate business risk. The impact of operating leverage is evident when a given percentage changes in net sales results in a greater percentage change in operating income (EBIT)-earnings before interest and taxes. Operating leverage is calculated as follows: DOL = CM/EBIT-contribution margin divided by earnings before interest and taxes or percentage change in EBIT divided by percentage change in sales (revenues).

Combined Leverage: Degree of combined leverage (DCL) is the combination of the effects of business risk and financial risk. Degree of operating leverage (DOL) and degree of financial leverage (DFL) combine to magnify a given percentage change in sales to a potentially much greater percentage change in earnings or operating income (EBIT). There is a direct relationship among the degrees of operating leverage (DOL), financial leverage (DFL) and combined leverage (DCL). A firm’s degree of combined leverage (DCL) = DOL X DFL or CM/EBIT X EBIT/EBT that is CM/EBT. The degree of combined leverage (DCL) may also be calculated as percentage change in EPS divided by percentage change in sales that is the percentage change in earnings per share emanating from a unit percent change in sales volume.

Optimal Capital Structure: This is the appropriate use of debt and equity that minimizes the firm’s cost of capital and maximizes its stock price. Please note that a non-optimal capital structure or lack of optimal debt and equity mix may lead to higher financing costs and the firm may reject some capital budgeting projects that would have increased shareholders’ wealth with an optimal financing. Further, the effects of different capital structures and differing degrees of business risk are reflected in a firm’s income statement. Please note that operating leverage tends to magnify the effect of fluctuating sales (revenues) and produce a percentage change in operating income (EBIT) larger than the change in sales (revenues) while financial leverage tends to magnify the percentage change in EBIT and produce a larger percentage change in EPS. Therefore, a change in sales (revenues) through operating leverage affects EBIT. This change in EBIT through the effect of financial leverage subsequently affects EPS.

Some Useful Guidelines:

When a firm grows, it needs capital which may be funded by equity or debt. Debt financing has costs and benefits. Debt has two significant benefits: Interest paid is tax deductible, which minimizes debt’s effective cost; and debt carries a fixed charge, so stockholders do not have to share their net income if the enterprise is extremely profitable. On the other hand, high debt ratio indicates higher risk and hence higher cost of capital; and if the firm fails to earn sufficient income to cover its fixed charges it must produce the shortfall or face bankruptcy. Therefore, firms with volatile earnings and operating cash flows must limit their use of debt financing. Certainly, effective cash flow and leverage management is critical to prudent and sound strategy designed to maximize the wealth producing capacity of the enterprise. Additionally, strategic analysis, market analysis and financial analysis should be internally consistent and congruent. The EBIT/EPS analysis allows a firm to evaluate the effects of different capital structure on operating income and the level of business risk. The variability of sales or revenues over time is a basic operating risk. Please note that in capital budgeting for a specific project to increase shareholders’ wealth, it must earn more than its cost of capital or hurdle rate.

In practice, firms tend to use target capital structure-a mix of debt, preferred stock, and common equity with which the enterprise plans to raise needed funds. And because capital structure policy involves a strategic trade-off between risk and expected return, the optimal capital structure policy must seek a prudent and informed balance between risk and return. The firm must consider its business risk, tax position, financial flexibility and managerial conservatism or aggressiveness. While these factors are crucial in determining the target capital structure, operating conditions may cause the actual capital structure to differ markedly from the optimal capital structure. Therefore, the target capital structure should be used as a guide toward an ideal capital structure that minimizes the weighted average cost of capital (WACC) while maximizing the shareholders’ wealth.

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For the past 40 years, up until 2007, the American press has ransacked Colombia and particularly, Medellin. But with the sound leadership of President Uribe (80% approval rating) Colombia has overcome many of its security issues and now offers possibly one of the greatest real estate opportunities of all time.

Medellin is a cosmopolitan city of 4 million people that rivals anywhere on earth in terms of beauty, climate and cleanliness. At 4200 ft altitude in a mountain valley near the equator Medellin virtually has a springtime climate every month. There are also very few bugs or insects. Thus there is no need for air conditioning, heaters, screens or bug spray. Even the poorest people here have million-dollar views. The city is very clean even in the poorest areas. There are more universities here than in Boston MA. The health care in Medellin is excellent and many people are now coming to Medellin for plastic surgery and dental work at 1/4th the cost in the US.

In El Poblado, Medellin’s most luxurious suburb, there is more high rise construction than in NYC, Los Angeles and Philadelphia – combined. El Poblado is sort of like Brentwood CA but with hills, views and more vegetation. The local populace, paisas, are extremely friendly and like Americans. The women of Medellin are the most beautiful in the world and friendly to boot. No attitudes here and they are warm and family orientated. There is no age discrimination and in fact it is an honor to socialize or date a “maduro”, a mature person.

Condominiums and homes in Medellin are cheaper than Costa Rica, Mexico, Panama, the Caribbean and most parts of South America. Quality construction with million dollar views can be had for $50-80 per square foot in the nicest part of Medellin and for less in other very attractive neighborhoods. On a comparative basis Medellin is the least expensive of any major cosmopolitan city in the world.

If one looks at what happened to real estate prices in Costa Rica and Panama when Americans began investing there 7-12 year ago, the prices went up more than 800%. For anyone who has visited all three places they will tell you that Medellin is superior in every respect. So when America discovers that the crime rate in Medellin is less than Atlanta, Baltimore, St Louis, Washington DC, Detroit, New Orleans, and other major US cities and continuing to drop, there will be new interest in discovering Medellin. There is a reason that National Geographic named Colombia as one of its top six tourist destinations for 2008.

But the real proof that the truth about Colombia and Medellin will soon be realized is that in the past 18 months there have been more than 130 positive articles about Colombia and Medellin in US newspapers, magazines and TV. This is more good news than in the previous 50 years combined. There are news archives available on the Internet where these articles and TV clips can be accessed. Between the good news and word of mouth, American visa requests in Colombia are at an all time high and growing.

Timing and location is everything in terms of successful real estate investing. Medellin’s location is second to none and the timing could not be better. Do your research and discover why Medellin is truly the world’s best kept real estate secret whether for investing, as a second home or to retire early and live like a king. It is truly an opportunity to “own a piece of paradise”.

Broker Agent

OBJECTIVES OF WRITING THIS ARTICLE: Forensic accounting(F.A.) has come into limelight due to rapid increase in financial frauds and white-collar crimes. But it is largely untrodden area in India.The integration of accounting, auditing and investigative skills creates the speciality know as F.A.The opportunities for the Forensic Accountants are growing fast;they are being engaged in public practice and are being employed by insurance companies, banks, police forces, government agencies etc.This article seeks to examine the meaning and nature, activities and services rendered, core knowledge and personal skills required for forensic accounting as a specialized field in accountancy profession. Indeed there is a future in F.A. as a separate niche consulting.

The lack of respect and belief in India’s law enforcement agencies and the rate at which white-collar crimes have increased has prompted the development of Forensic Accounting in India. The fraud detecting agencies seems to lack time and devotion needed for detecting and prevention of errors and fraud. According to a large global accounting firm, the market is sufficiently big enough to maintain an unit devoted entirely towards “forensic accounting”. Many large as well as small accounting firms as well as the tiny firms have inculcated or rather developed separate forensic accounting departments.

We were of the belief that detection and prevention of frauds or white-collar crimes is part of conventional accounting function. It was thought that the frauds, both internal as well as external has be to detected by the auditors through their periodic audit. Now it is crystal clear that auditors can only check for the compliance of a company’s books to generally accepted accounting principles, auditing standards and company policies. Hence the need was felt to detect the frauds in companies that are suspected to be engaged in fraudulent transactions. This field of accounting is known as “forensic accounting”.

The litmus test of investigation, first introduced by the ever great Sherlock-Homes(considered by many as the father of Forensic Accounting) is perhaps the first ever application of forensic accounting. Though, the contribution of the other few great historians to the field of forensic accounting cannot be overlooked. They used various tricks to investigate various crimes.

F.A. is a specialized a area of accounting practice that describes engagements which result from actual or anticipated disputes or litigation. The word “forensic” means “suitable for use in court”. The forensic accountants have to keep in mind this statement while they have to work or chalk out their programme. The F.A. work is tailor made according to the situation and need. The gathering of information and evidences is done according to the need and situation. We can say, it is customized according to the situation. The forensic-accountants give expert evidence at the ultimate trial. All the modern medium-sized as well as the large-sized accounting firms have specialized forensic accounting departments. Within these firms there may be specialized forensic accounting departments. Within these groups their may be further sub-specializations. Various sub-specializations include insurance claims, personal injury claims, fraud detection, construction or royalty audits. Nearly 40 percent of the top 100 US accounting firms are expanding their forensic and fraud services, according to Accounting Today. Now if we consider this data as significant then we can say that the total contribution of forensic accounting to the total revenue of the C.A. firms would be highly significant in the years to come. Under rising instances of frauds and litigation and flourishing businesses these services are considered to be very significant as they are rendered at a very competitive price.

The forensic accountants utilize the various information relating the business, utilizes financial reporting systems, various accounting and auditing standards and procedures, investigative techniques and litigation processes and procedure to perform their work. By acting as advisors to audit committees and assisting in investment analyst research, they are playing more “proactive” risk reduction roles.This is possible by designing and performing extended procedures as part of the statutory audit. The objectives of such an accounting include measurement of losses caused by an auditor due to his negligence, to look into the matter whether their has been any embezzlement of cash, the amount, necessity of criminal proceedings, computation of asset values in a divorced proceeding.

The primary approach technique of forensic accounting is explanatory analysis(cause and effect)of the phenomena-including the discovery of deception(if any), and its effects -introduced into an accounting system field. The primary methodology employed by the forensic accountants is the verification of the objective. They are trained to deal with real world business and do have the sufficient expertise to look beyond(behind) the numbers. The scope of the forensic accountants are growing at a rapid pace. The increase in their work opportunities have been accelerated due to the fall of the Enron corporation and the collapse of the American Twin Towers.

This has led to increase in the demand for American forensic accountants. So as far India is concerned, formation of Serious Fraud Investigation Office(SIFO) is a landmark creation so far as forensic accountants are concerned. Failure of regulators to track security scams, increasing cyber crimes, chain of cooperative banks bursting -all point to the ever increasing need for forensic accountants. Our understanding of the need for forensic accountants is immaterial here. In India due to the growing number of frauds the need for forensic accountants is ever increasing. The regulatory and administrative agencies will put pressure for greater demand of forensic practices. This has been initiated due to the changing nature of Indian and International accounting.Auditing and assurance standards also confirm this. A change in the curriculum can be initiated if the written exams and practical industrial training are boosted to show the “new knowledge base and skill-set” required by the professional accountants in the new era. It is therefore recommended that the “forensic accounting and auditing” be introduced as a paper in the various professional examinations conducted by the various accounting bodies in India. Unfortunately forensic accounting is largely an unexplored area as far as India is concerned. The chartered Accountants(CAs) deal with such cases in an irregular fashion. In the western counter-part(countries), the Lawyers, police, insurance companies, government and regulatory bodies, banks, courts and business communities are increasingly utilizing the services of the forensic accountants.The accountants and the auditors must have the skills and expertise to venture into the emerging field of forensic accounting.

What Is Forensic Accounting? The growing needs of corporations has changed the definition of forensic accounting. As per Bologna and Indquist, “the application of financial skills and an investigative mentality to unresolved issues, conducted within the context of rules of evidence.It is a new emerging field that encompasses financial expertise, fraud knowledge, and a sound knowledge and understanding of business reality and the working of the legal sytem.”It means that the forensic accounting should be skilled not only in financial accounting but also internal control systems, the legal matters, other institutional requirements, investigative blend of mind and interpersonal skills.

According to AICPA: “Forensic accounting is the application of accounting principles, theories, and discipline to facts or hypotheses at issues in a legal dispute and encompasses every branch of accounting knowledge: ‘ Similarly, forensic accounting is defined by Horty as:

“The science that deals with the relation and application of finance, accounting, tax and auditing knowledge to analyze, investigate, inquire, test and examine matters in civil law, criminal law and jurisprudence in an attempt to obtain the truth from which to render an expert opinion.”

In simple words, forensic accounting includes the use of accounting, auditing as well as investigative skills to assist in legal matters.It comprises of two major components: litigation services, that recognizes the role of an accountant as an expert consultant and investigative services, that uses a forensic accountant, s skills and may require possible court-room testimony.

Investigation of theft and defalcation of corporate and individual assets are part of legal matters.They use their education as well as experience to discuss the facts, patterns of the theft or misappropriation.Business accounting systems are reviewed by the forensic accountants.They suggest ways and means to solve and improve the internal control and internal accounting system.This is adopted to prevent theft and fraud. Because of their expert knowledge and educational background and experience their(forensic accountants) work is elevated to a new height.

Forensic accountants do not contest in cases.They act as fact finding devices, try trt to seek the real truth from the hidden facts.They conduct their work in an unbiased and objective manner.They need legal knowledge, expertise, training and experience to perform their work in an effective and real manner.Extensive knowledge in the field of commerce, legal, accounting as well an investigative blend of mind is needed to perform the work in a proper fashion.Expertise in litigation support and testimony in courts of law are also prerequisites of the forensic accountants.This is due to the fact that their work would many times be used in a court of law.The valuation of damages due to criminal and civil wrong-doings need to be done with perfection and for that reason knowledge of business valuation theory is the most essential.

What exactly do the Forensic Accountants perform? Answer: They are trained to deal with real life business situations and are trained to look beyond the numbers.

Analysis, interpretation and summarization of complex financial and business related issues are prominent characteristics of this accounting/auditing profession. Familiarity with legal concepts and procedures is a must.Insurance companies, public practice, banks, police forces and government agencies are major employers of forensic accountants.

The various field of work encompassing the arena of a forensic accountant can be stated in points format as follows:

1) Financial evidence investigation and analysis.

2) Development of computerized software to help in the analysis and presentation of financial evidence.

3) Sharing their findings in the form of reports, slide shows or exhibits and documents collected.

4) To support trial evidence they prepare visual slides, assist in legal proceedings, including testifying in courts as an expert witness.

If we want to say or rather point out the role performed by the forensic accountants in a nutshell, we can say as follows:

Measurement or to quantify the impact of lost earnings. Such as construction delays, stolen trade secrets, insurance disputes, damage/loss estimates, malpractice claims, employee theft, loss of profit, financial solvency reports, disturbance damages, loss of goodwill, compensation losses suffered in expropriation determination, assessment of the potential business compensation costs and providing consultation on business defalcation minimization. Lease default damages, breach of contract, business interruptions, breaches of shareholders and partnership agreements, reconstruction of accounting records,

Investigation of misappropriation, assistance in establishing ownership and division of assets, commercial damages, professional negligence cases, partnership disputes, expert evidence, fair value or fair market value and personal injury damages are included in commercial damages. Tax advocacy, compliance and review of financial statements, tax reporting and tax planning in such areas as income as estate matters are included in tax matters. Analysis, interpretation, summarization, presentation of complex financial and issues relating to the business for investigation is the role of a forensic accountant.

They carry out investigative accounting and provide litigation support.

The services rendered by the forensic accountants are in great demand in the following areas:

1) Fraud detection where employees commit Fraud:

Where the employee indulges in fraudulent activities:

Where the employees are caught to have committed fraud the forensic accountant tries to locate any assets created by them out of the funds defalcated, then try interrogate them and try to find out the hidden truth.

2)Criminal Investigation: Matters relating to financial implications the services of the forensic accountants are availed of. The report of the accountants are considered in preparing and presentation as evidence.

3) Outgoing Partner’s settlement:

If the outgoing partner is not happy about his settlement he can employ a forensic accountant who will correctly assess his dues(assets) as well as his liabilities correctly.

4)Cases relating to professional negligence:

Professional negligence cases are taken up by the forensic accountants.

Non-conformation to Generally Accepted Accounting Standards(GAAS) or non compliance to auditing practices or ethical codes of any profession they are needed to measure the loss due to such professional negligence or shortage in services.

5) Arbitration service: Forensic accountants render arbitration and mediation services for the business community, since they undergo special training in the area of alternative dispute resolution.

6) Facilitating settlement regarding motor vehicle accident: As the forensic accountant is well acquainted with intricacies of laws relating to motor vehicles, and other relevant laws in force, his services become indispensable in measuring economic loss when a vehicle meets with an accident.

7) Settlement of insurance claims: Insurance companies engage forensic accountants to have an accurate assessment of claims to be settled. Similarly, policyholders seek the help of a forensic accountant when they need to challenge the claim settlement as worked out by the insurance companies. A forensic accountant handles the claims relating to consequential loss policy, property loss due to various risks, fidelity insurance and other types of insurance claims.

Dispute settlement: Business firms engage forensic accountants to handle contract disputes, construction claims, product liability claims, infringement of patent and trade marks cases, liability arising from breach of contracts and so on.

9) Matrimonial dispute cases: Forensic accountants entertain cases pertaining to matrimonial disputes wherein their role is merely confined to tracing, locating and evaluating any form of asset involved.

Core Knowledge Of Forensic Accountants:

A forensic accountant is expected to be a specialist in accounting and financial systems. Yet, as companies continue to grow in size and complexity, uncovering fraud requires a forensic accountant to become proficient in an ever- increasing number of professional skills and competencies. Here are some of the broad areas of useful expertise for a forensic accountant:

” An in-depth knowledge of financial statements and the ability to critically analyse them. These skills help forensic accountants to uncover abnormal patterns in accounting information and recognise their source.

” A thorough understanding of fraud schemes, including but not limited to asset misappropriations, money laundering, bribery, and corruption.

” The ability to comprehend the internal control systems of corporations, and to set up a control system that assesses risks, achieves management objectives, informs employees of their control responsibilities, and monitors the quality of the programme so that corrections and changes can be made.

” Proficiency in computer and knowledge of network systems. These skills help forensic accountants to conduct investigations in the area of e-banking and computerised accounting systems.

” Knowledge of psychology in order to understand the impulses behind criminal behaviour and to set up fraud prevention programmes that motivate and encourage employees.

” Interpersonal and communication skills, which aid in disseminating information about the company’s ethical policies and help forensic accountants to conduct interviews and obtain crucially needed information.

” Thorough knowledge of company.s governance policies and the laws that regulate these policies.

” Command of criminal and civil law, as well as, of the legal system and court procedures.

Personal Skills Required:

So what does it take to become a forensic accountant? In addition to the specialised knowledge about the techniques of finding out the frauds, one needs patience and an analytical mindset. One has to look beyond the numbers and grasp the substance of the situation. There is a need for the same basic accounting skills that it takes to become a good auditor plus the ability to pay attention to the smallest detail, analyse data thoroughly, think creatively, possess common business sense, be proficient with a computer, and have excellent communication skills. A “sixth”sense that can be used to reconstruct details of past accounting transactions is also beneficial. A photographic memory helps when trying to visualise and reconstruct these past events. The forensic accountant also needs the ability to maintain his composure when detailing these events on the witness stand. Finally, a forensic accountant should be insensitive to personal attacks on his professional credibility. A fraud accountant (as forensic accountants are sometimes called) should also observe and listen carefully. By this, you can improve your ability to detect lies whether they involve fraud or not. This is so because”not all liars are fraudsters, but all fraudsters are liars”(Wells).

According to a forensic accounting expert, “the traits of a forensic accountant could be compared to a well-baked pizza. The base of forensic accounting is accounting knowledge. Size and the extent of baking decide the quality of the pizza. A middle layer is a dispersed knowledge of auditing, internal controls, risk assessment and fraud detection. It is like the spread of the cheese in pizza. The toppings of this pizza area basic understanding of the legal environment. The legal environment is essential in order to support the litigations. The cherry on the toppings of the pizza is a strong set of communication skills, both written and oral. It is just the beautification part. Perfect combination of the pizza base, cheese spread and good toppings makes the pizza delicious and the of company’s the laws that Forensic Auditor perfects. It is a combination that will be in demand for as long as human nature exists.”

In addition to these personal characteristics, accountants must meet several additional requirements to become successful forensic accountants, say a Certification, acknowledging his competence. One can learn forensic accounting by obtaining a diploma given by Association of Certified Fraud Examiners (ACFE) in the US. Indian chapter of ACFE offers the course based on the white-collared crimes prevalent in US, based on their laws. However, there is no formal body that provides formal education of the frauds in India. Besides the formal certificate, one can deepen one’s knowledge and sharpen one’s skills in forensic accounting by undergoing training under an experienced forensic accountant, participating in various international conferences, reading relevant journals, books and other literature on forensic accounting.

To combat the frauds effectively one needs the active support of government at every stage. There are three-four such agencies in India, which are dedicated to the mission of combating frauds. Serious Fraud Office looks into violations of Income Tax, FEMA, RBI Act, etc.; CBI (Economic Office Wing) deals with big financial frauds; Central Vigilance Commission deals with corruption. These are the major government agencies that combat frauds of different types. Unfortunately, there is no specialised education provided by any of the Universities in the country. Recently, TCS has also come out with software to combat money laundering and Subex Systems have designed software to combat the telecom frauds. Thus, combating the frauds with software has started picking up in India, with few big companies like ACL and IDEA, joining the race.

The Need For Niche Consulting:

The CPA Vision Statement states: “The CPAs are trusted professionals who enable people and organisations to shape their future. Combining insight with integrity, CPAs deliver value by: (a) communicating the total picture with clarity and objectivity, (b) translating corn plex information into critical knowledge, (c) anticipating and creating opportunities, and (d) developing pathways that transform vision into reality1 It reflects the trend towards providing a broader range of assurance services. However, recent corporate accounting scandals and the resultant outcry for transparency and honesty in reporting have given rise to two disparate yet logical outcomes. First, forensic accounting skills have become crucial in untangling the complicated accounting manoeuvres that have obfuscated financial statements. Second, public demand for change and subsequent regulatory action has transformed corporate governance. Increasingly, company officers and directors are under ethical and legal scrutiny. Both trends have the common goal of responsibly addressing investors’ concerns about the financial reporting system. Indeed, there is a future in forensic accounting as a separate”niche” consulting area in India. The need to specialise, otherwise known as Niche Consulting, is imperative to practising accountants because the fast-paced developments in business thereby demand specialised knowledge and skills. While a majority of CAs have excellent analytical skills, they need to acknowledge that ‘forensic’ services require ’specialised’ training as well as real-life ‘practical’ corporate experience. There is a need for specialised information, not just audit and tax service. What clients seem to want are people with unique sets of skills and experiences. With the maturing of the audit business, and the rapid development of technology that makes existing services low cost and cheap, it appears that it is the right time now to acquire those unique skills. To help practitioners move into ‘niche’ consulting, some professional organisations in the US have concluded that: “Future success for the profession depends, in part, on how the public perceives the ability of CPAs. New efforts in consulting, specialisation and understanding global business practices and strategies are considered crucial. We go out into the niche market, examining our strengths first. We go where the action is, only then we know we can adequately service our clients and make money doing it.” One area where ‘niche’ consulting is becoming the global trend is in “Forensic Accounting and Auditing’ But the major question facing the Indian accountancy profession is: Are we ready to plunge to where the challenging action is?

Forensic Accounting In India:

It is in an infancy state in India.It is still an untrodden area in India.But due to ever increasing cases of bank & cyber-frauds its growing importance cannot be denied.

One immediate landmark creation is “Forensic Research Foundation”.They provide support for investigation of fraud.They publish one bi-monthly journal named as “White Crimes”.It relates to forensic and economic crimes. Another international organization named as KPNG has set up investigation detection centre in India.. Networks Limited, a Delhi based organization, working in the similar field, they are also trying to innovate ways and means to detect financial irregularities and crimes in India.Serious Investigation Fraud Offices(SIFO), has been established in India for the same reason, i.e. detection and prevention of economic irregularities and crimes. The need for such bodies and the importance of Forensic Accountants have been highlighted by L.N.Roy Committee.Lenin Parekh Committee has also expressed the view that one “fraud detection committee”need to be established. The main aim of such boards should be to prevent the interest of the stakeholders.

Conclusion:

Forensic accounting in India has come to limelight only recently due to rapid increase in white-collar crimes and the belief that our law enforcement agencies do not have sufficient expertise or the time needed to uncover frauds. A large global accounting firm believes the market is sufficiently large to support an independent unit devoted strictly to ‘forensic’ accounting. All of the larger accounting firms, as well as, many medium-sized and boutique firms have recently created forensic accounting departments.

Forensic accounting, in fact, integrates accounting, auditing, and investigative skills to conduct an examination into a company’s financial statements. Broad-based knowledge (within the themes listed above) is crucial to the success of entry-level forensic accountants. Because forensic accounting is relatively a new area of study, a series of working definitions and sharing of corporate experiences should be undertaken and encouraged to ensure a common understanding. Indeed, there is great future in forensic accounting as a separate”niche” consulting.

While the forensic accounting and auditing practice had commenced in the US as early as ‘1995, the seed of this specialisation has yet to take off in India. Forensic accountants are only dealing with financial implications of the cases entrusted to them and not engaging in auditing exercise. On account of global competition, the accounting profession must convince the marketplace that it has the “best-equipped” professionals to perform such services.

Forensic accountants are also increasingly playing more ‘proactive’ risk reduction roles by designing and performing extended procedures as part of the statutory audit, acting as advisors to audit committees, and assisting in investment analyst research.

While majority of CAs have excellent analytical skills, they need to acknowledge that ‘forensic’ services require ’specialised’ training as well as real-life ‘practical’ corporate experience.

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References: -

1)Journal Of Forensic Accounting: Editor-In Chief: Crumbley D. Larry, Publisher: Inc.Edwards. R.T.

2)Journal Of The Chartered Accountant 2007, Pages: 1000-1010.Dr. Madan Bhasin, The Author is Head, Accounting Department, Mazoon College, Muscat, Sultanate Of Oman.

3)Referential Notes Of Prof. Dutta Kr. Uttam, Reader Deaprtment Of Commerce, Reader, University Of Burdwan.

4)Website access: http://www.wikipedia.com, accessed on 4th, February, 2008.

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So to switch things up a little, in this property management training story I wanted to step back and take a look at some of the factors that can affect the cash flow and the possible appreciation, or heaven forbid deprecation, of your real estate investment.

Before I talk about that, though, let me share a story about one of my favorite questionable rental housing markets.

Las Vegas, Nevada.

Property Management Training In Vegas

I’m picking on Vegas because lately I’ve been hearing a lot of otherwise intelligent people suggest that now is a good time to invest there. Maybe yes, maybe no.

Here’s my story.

Years ago, before the house rental market really took off I had the opportunity to travel to Las Vegas once every month or so, for the better part of a year.

What eventually struck be about the place was how absolutely artificial it was, and what a huge – and I mean huge – impact the casino industry had on the city.

Bigger Than Some Small Towns

Most if the casinos have infrastructures larger than some small towns. And the number of people they employ is huge.

There are schools devoted strictly on training people how to work in various jobs in the casinos.

And I don’t mean casino or hospitality management. I mean blackjack dealers, waiters, car hops, jobs of that nature.

There are actually schools devoted strictly to this. One morning on the way to an appointment I drove by one, and the parking lot was jam packed.

Now you may be reading this and thinking to yourself, “No kidding Jeffrey, Vegas is all about gambling.”

And you would be right. Except I would say, it’s ALL about gambling.

How Economic Drivers Influence Real Estate Investing and Property Management

Which means if you’re investing in a rental property in Las Vegas you’re really investing in the casino industry, and how well the casino industry is doing will have a 100% impact on the success of your investment and property management efforts.

The casino industry in Vegas is what we’d call the economic driver.

If they’re driving the economy forward, if they’re employing people, paying a decent wage, and managing to keep them happy, your how to rent my house efforts will be positively impacted because there will be plenty of people who can afford to rent your house.

On the other hand, if the casino isn’t doing well, then you’d better make sure you’re applying all of the methods from the property management training you’ve received if you want your rental property to be a success.

For sure Vegas is an extreme example, but it illustrates my point well.

I’m always surprised that 9 out of 10 of the real estate investors I see focus only on price and spend little if no time thinking about the economic drivers for the area they’re investing in.

It’s Not All About Price

Naturally, if you’ve invested in some basic property management training you’re in the top 10% and understand economic drivers and the big picture.

Here are some of the top items I consider when thinking about economic drivers, real estate investments, and managing real estate:

Is the market ever going to come back?

This is true of certain neighborhoods within a city as well as certain cities or even parts of the country. If your market is dependent on politics, its probably already booming. On the other hand, if you’re hoping that the auto industry in Detroit will come back, that I’m not so sure about.

How stable are the rents?

Consider whether more rental homes will come onto the market at prices lower than what you paid. If so, your competition will have more flexibility in adjusting rental rates that you will.

Will the demand for your rental property soften?

Right now there’s a lot of activity in the apartment and multi-family market.

Common sense property management training should cover the pros and cons of different property types.

If you’re investing in multi-family property, spend some time thinking about how your rents and tenant quality might be affected if more and more single family homes come on the market at rents close to what your apartment rents are.

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Are you an entrepreneur? If you are, then I believe you will familiar with the pattern or business challenges faced when starting and building a business from scratch. If you are not an entrepreneur but you dream of becoming one someday, then I think you will find this article worthwhile.

Why am I writing on such a topic? I decided to write on the “10 business challenges every entrepreneur must face when building a business from scratch” to give entrepreneurs a glimpse of what to expect when they set out to start a new business venture. I am not writing to show my writing skills. Moreover, I am not a professional writer; I am an entrepreneur and investor to the core. I simply write to share my knowledge on building a business with anyone who is willing to learn.

This article is not meant to discourage or scare you from going into business. Instead, I wrote this article to prepare and highlight you on the business challenges to expect and how to handle them. Just as the popular saying goes:

“He that is prepared has half won the battle.”

Below are 10 Business Challenges Every Entrepreneur Must Face When Building a Business from Scratch:

1. Developing the Vision and Idea:

This is usually the first challenge faced by every entrepreneur. Finding the right business opportunity or creatively developing an idea is certainly not an easy task. I call “Envisioning the idea” the first true task of an entrepreneur. As an entrepreneur, you must develop the ability to see what others cannot see. While others see problems, you must see opportunities.

But seeing opportunities is just the first task. The main challenge is going to be your ability to forge that opportunity into a business idea. I see this as a business challenge because the process of transforming opportunities into business plans is like trying to turn lead into gold. I call it the process of “Creating Value out Of Nothing.” If you are not an entrepreneur, you might not be familiar with the process. The process of:

- Identifying a problem

- Seeing an opportunity in the problem

- Coming up with a solution

- Developing your opportunity into a business idea

- Integrating your solution into the business plan

Another way “developing the vision and idea” will be a business challenge is that an entrepreneur must sometimes assume the role of a sorcerer. Let me explain in detail. While others dwell in the past and present, an entrepreneur must envision and forecast the future. An entrepreneur must always be ahead of his time or else he might lose his relevance. He must have the ability to bring into present what is yet to be. Let me give you some practical illustrations:

In the late 70s and early 80s, while IBM saw increase in demand for their mainframe computers, Steve Jobs envisioned a personal computer in every home and Bill Gates envisioned the need for easy to use software for personal computers.

While everyone saw humans flying as an impossibility, the Wright brothers envisioned a flying machine.

Back in those days when cars were custom made and exclusively for the rich, Henry Ford envisioned affordable cars for the masses.

I believe with these few examples, my point is clear. Developing the vision and idea is the first true task of an entrepreneur.

2. Raising Capital:

After developing your idea, the next challenge you are going to face is the challenge of raising capital. As an entrepreneur, you are the only one who knows the idea to the core. You are the only one who knows the story of the future. Trying to convince investors about something that doesn’t exist is definitely a challenge.

There is more to raising capital than just simply asking for money. Most investors want to invest in already established businesses with minimal risk. When building a business from scratch, raising capital will definitely be a business challenge you must face.

To overcome this challenge, you must develop the ability to sell your idea and vision to potential investors. When I say “sell your ideas”, I mean improving your communication skill and your manner of presentation. In the game of raising capital, you must have a good story backed by a strong business plan. If you are interested in learning how to successfully raise capital, you can check other articles I have written.

3. Assembling a Team:

The third challenge you must face in the course of developing a business is assembling the right team. When I talk about a team, I am not talking about regular employees. I am talking about a “round table strategic business team” that will meet regularly to brainstorm on ways to grow your business.

As an entrepreneur, you are bound to have strengths and weaknesses. That is the more reason you need to assemble a strong team that will cover up for your weaknesses. A team is a necessity in your quest to build a business. Now finding a business team is just the first hurdle, transferring your passion and vision to your team is the real piece of cake.

You must strive to make sure your team sees the future you see. They must believe in your possibilities and must also be passionate about making that possibility a reality. If they can’t grasp your vision, if they can’t see they future with you, then they are not worthy being your team.

Your strategic business team should comprise your banker, financial advisor, accountant, attorney or legal adviser and any other specialist that will be of tremendous impact to your business. A question on your mind might be “how am I going to pay this team? My answer is I don’t know. You will have to figure it out yourself or better still, you can consider bringing them on board as partners.

If you are still at loss with the thought of assembling a business team, then I will recommend you either take some time in learning how to build a business team or you can visit strategicbusinessteam.com to get some advice.

4. Finding the Right Location:

You might feel that finding a good location is a piece of cake but I bet you that finding a good location at the right price is definitely not easy. I don’t have much to write on this but I feel it is worthwhile I bring it to your notice so you can prepare for it. The following are features you must consider before choosing a location. These features are subject to change with respect to the industry of your business:

- Suitable price

- Easy access to raw materials

- Good road network.

- Basic amenities and infrastructures

- Adequate Power supply

- Easy access to cheap labour

- Nearness to high traffic roads

- Moderate state and federal tax

- Favorable Government fiscal and monetary policy

- Favorable federal and state laws.

- Current economic policy and political situation.

5. Finding the Right Employees:

Most writers crank up the process of finding good employees as an easy task. They define finding an employee as simply presenting the job description and the right employee will surface. But I think it’s more than that.

Those who are really business owners know how difficult it is to find a hardworking, trustworthy employee. Most employees want to work less and get paid more. Finding a good employee who will be passionate about delivering his or her services is quite difficult.

Employees are your representatives to your customers and the outside world. They are a reflection of your business culture and ethics. If an employee of yours is bad or rude to your customers, it is going to portray a bad image of your company. So you must be careful when hiring employees. Remember the golden rule of business; “Hire slow and fire fast.”

6. Finding Good Customers:

The sixth business challenge you will face is the challenge of finding good customers. Note the keyword “good customers.” When in the process of building a business from scratch, you will come to find out that there are good customers and bad customers.

You must really be on guard for bad customers. Good customers are really hard to find. A good customer will be loyal to your company and will be willing to forgive you if you make a mistake and apologize. A good customer will try to do the right thing that will benefit both himself and the company mutually.

A bad customer will always look for loopholes in the company’s policy to exploit and make some few gains. Bad customers will always try to exploit the company’s goodwill and look for ways to rip off the company. Bad customers are responsible for bad debts.

Good customers build your business and bad customers will always try to liquidate your business. Just as you fire employees, you must also be prepared to fire bad customers without hesitation. In the game of trying to find a new customer, always remember the customer that sued McDonald’s to court claiming the coffee was too hot.

7. Overcoming Competition:

Competition is the next challenge you will face. Most individuals see competition as a plague but I see competition as a good challenge. I see competition as a benchmark for creativity, the main engine for innovation and quality products at great prices. Without competition, there will be no innovation and without innovation, the world will be stagnant.

I see competition as a welcomed challenge and I want you to do the same. Competition keeps us on our toes and drives us to constantly improve our products and services. But you must be warned. Competition can make your business lose its relevance in the eye of your customers so you must always be on guard. At this point, I leave you with a quote:

“If you don’t have a competitive advantage, don’t compete.” – Robert Kiyosaki

8. Unforeseen Challenges and Expenses:

Just as a sailor prepares for unexpected storm, just as a pilot is always on the watch for unpredictable bad weather and thunderstorms, so must an entrepreneur be prepared for what ever comes. Unexpected challenges can come in the form of:

- Unexpected law suits

- Inconsistent government policy

- Not being able to make payroll

- Unpaid bills and taxes

- Unexpected resignation of staff from sensitive office

- Bad debts from customers

- Loss of market share

- Dwindling working capital

- Inadequate stock or inventory

These challenges, if not handled properly can ruin your plan to build a successful business from scratch. Another challenge you must expect is an unforeseen increase in business expenses. If not handled properly, it might result in constant negative cash flow and eventually, the business failure.

9. Keeping Up With Industrial Changes and Trends:

Change in trends is really a business challenge you must be prepared for. Trends have made and broken lot of businesses. I know a lot of profitable businesses that have been wiped out by slight industrial changes and trends. A typical example is the Dot com trend, where many industrial based businesses were wiped out by new web based dot com companies.

When the Dot com era began, business owners were left with only two options. Either they join the dot com train or they get crushed by the dot com train.

Seasoned entrepreneurs know that trend is always a friend and are always willing to swiftly adjust their business with the current trend. Keeping your eyes open to spot trends is really a challenge but the big task will be your ability to quickly use the trend to your advantage.

10. Exiting the Business:

“In the world of business and investing, your exit is more important than your entry. A good thumb of rule is this; exit before you enter.” – Robert Kiyosaki

When building a business from scratch, you are going to face the business challenge of determining your exit strategy. Just as the quote above states, you have to plan your exit strategy before you even start the business. Most entrepreneurs run their business without any plans to exit and even if they have an exit strategy, they find it difficult to implement it.

Before starting a business, it is advisable to always plan your exit. There are benchmarks you can use to determine your exit from the business. Most smart entrepreneurs will use this benchmark as a target and once this specific target is reached, they exit the business. Examples of such benchmarks are:

- Annual sales

- Annual Turnover

- Asset Base

- Market Saturation

- Customer base or number of users. This is more applicable to dot com companies.

Now when it comes to exiting the business, there are three exit strategies you can apply. The exit strategies are:

Turning over the business to professional managers: When your business reaches a certain stage of maturity, you can exit by turning it over to professional managers. In this case, the business still belongs to you but you are not involved with its day to day affairs. You will have to give up administrative role to assume the role of a watchdog. When you exit in this manner, you will have more free time to look into other projects or retire.

Selling the business privately: In this case, you are exiting the business by selling it to a private investor. In the business world, it is called M&A (Mergers and Acquisitions). After the sale and transfer of assets is complete, you have nothing to do with the business again.

Taking the company public: The unique thing about this type of exit strategy is that while you are selling your business (in form of shares) to public investors, you still own and control the business.

Please before you apply any of these exit strategy, I will advise you consult with your attorney or legal adviser. But ultimately, it’s up to you to decide the exit strategy you want to apply. Always remember “your exit is more important than your entry.”

At this stage, I thank you for reading and taking your time to learn. Till I come your way again, remain blessed.

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Cash is a vital component of any profit-generating organization. An organization’s assets generate revenue, which in turn generates cash inflows. These cash inflows are used for several purposes: to pay creditors, compensate employees, reward shareholders, provide asset replacement, and provide for growth.

Cash is unique because it’s the single asset that is readily convertible into any other type of asset. Therefore, it’s also the most widely desired asset. However, cash is also the asset that is most susceptible to fraud and abuse. Therefore, management has to ensure that adequate controls and safeguards are in place to eliminate any unauthorized transactions with cash.

Fortunately, there are ways management can safeguard the cash generated by its organization. Each of the following methods will help an organization prevent losses due to human error or theft:

o Monthly bank reconciliation

o Segregation of duties over cash handling

o Accountability for cash shortages

o Authorized cash disbursement

o Internal audits

Monthly Bank Reconciliation. Monthly bank reconciliation will help ensure that the amount of cash generated by an organization is consistent with bank records. In addition, an independent review of the reconciliation by management will provide an additional safeguard. Independent verification of bank reconciliation acts as a check to make sure the reconciliation was done properly and ensures there is no abuse of the organization’s cash.

Segregation of Duties Over Cash Handling. Every organization must make sure that there is adequate segregation of duties over cash handling. Separating the duties of cash receipts and disbursements prevents an individual from committing and concealing embezzlement.

Accountability for Cash Shortages. Management should hold supervisors accountable for cash shortages. If supervisors know that they’ll be held accountable for a cash shortage, they’ll be motivated to keep a close eye on how cash is used within their departments.

Authorized Cash Disbursement. Management should allow cash to be disbursed only through checks issued by authorized signers, which will provide a method for tracking cash usage. In addition, your organization should require signatures on all checks in order for them to be valid.

Internal Audits. Every organization should arrange to have internal audits conducted on a regular basis. Whether the auditors come from an internal audit staff or an outside auditing firm, auditing an organization’s accounting system can identify how effective and accurate the operation is and whether or not any improvements need to be made.

ESTABLISHING A QUICKBOOKS CONTROL ENVIRONMENT

QuickBooks allows more than one user to access company files. (Conceptually, an unlimited number of users may have access to the company’s data files, but only five users may work with the data at the same time.) When multiple users will have access to the company’s QuickBooks data files, it generally is necessary to create a control environment that protects the data from unauthorized use. For example, some users may not need access to sensitive payroll data, while others may not need access to accounts receivable and sales information.

One of the best ways to prevent errors when posting transactions in QuickBooks is to limit access to specified users. If passwords and access permissions are not assigned, users have unlimited access to all areas in QuickBooks. When setting up QuickBooks, one user should be designated as the QuickBooks Administrator.

The QuickBooks Administrator has unlimited access to all areas of QuickBooks and assigns passwords and access permissions to other users. The name and password for the QuickBooks Administrator can be set up by selecting “Set Up Users” from the “Company” menu. The QuickBooks Administrator must be set up before any other users can be set up. Although QuickBooks does not require the use of passwords, the QuickBooks Administrator should set up and use a password since anyone logging in to the company’s QuickBooks files as the administrator has full access to all areas in QuickBooks. After setting up a name and password, the QuickBooks Administrator should click the “Closing Date” button in the “User List” window and enter the date through which books are closed in the “Accounting” preferences dialog box. The administrator can also password-protect the closing date (requires single-user mode). When this feature is enabled, QuickBooks requires users to enter the password before they can make changes to periods that have been closed.

The QuickBooks Administrator is the only user who can:

o Set up other users.

o Change other users’ access permissions.

o Set up a company file using the “EasyStep Interview.”

o Change company information (such as company name, address, fiscal year, tax year, tax form, and federal identification number).

o Change company preferences.

o Condense data.

o Import and export data.

o Apply for QuickBooks Merchant Account Services.

Note: Since the QuickBooks Administrator has the ability to password-protect the entire company’s files, has access to all accounting functions, and assigns access to all other users, the company should carefully consider whom to select as administrator. The person selected should have an understanding of the importance of this position on the internal control of the company. Some companies designate the controller or Chief Financial Officer as the QuickBooks Administrator because those individuals normally do not have direct interaction with the software.

The QuickBooks Administrator can set up additional users and specify the areas to which each person has access. To do so, select “Company” from the menu bar and “Set Up Users.” Then click the “Add User” button in the “User List” window. Assign a user name and password for the new user. Even though QuickBooks does not require the use of passwords, each user should be set up with a password that must be used when logging in to the company’s QuickBooks file. (An unlimited number of users can be added, but only five can have access to the company’s data file at the same time.)

After setting up the user name and password, the administrator then specifies whether the user will have access to selected areas of QuickBooks or all areas of QuickBooks. The user should not be given access to all areas of QuickBooks since that permission essentially establishes a second administrator allowing users to access the following:

o Sales and accounts receivable.

o Purchases and accounts payable.

o Checking and credit cards.

o Inventory.

o Time tracking.

o Payroll and employees.

o Sensitive accounting activities such as bank transfers, general journal entries, and online banking.

o Sensitive financial reports.

o Changing or deleting transactions.

o Changing closed transactions.

Note: Even if users need access to most of the preceding areas, they should not be allowed to change closed transactions.

Rather than giving users access to all areas of QuickBooks, the QuickBooks Administrator should give users access to selected areas. In that case, the QuickBooks Administrator specifies whether the user should be given no access, full access, or selective access to each individual area listed in the preceding paragraph. If the user is given selective access in a particular area, the QuickBooks Administrator also must specify whether the user can (a) create transactions only, (b) create and print transactions and forms, or (c) create transactions and create reports.

Sensitive Accounting Activities. Users generally should not be given access to sensitive accounting activities. Such activities include:

o Maintaining the chart of accounts.

o Working in the account register for balance sheet accounts.

o Reconciling accounts.

o Making journal entries.

o Using the “Accountant’s Review.”

o Transferring funds between accounts.

o Using online banking.

o Creating budgets.

o Printing registers.

o Condensing data.

Even if users are given full or selective access to sensitive accounting activities, they cannot create financial reports (with the exception of the “Payroll Report”) or change or delete previously recorded transactions. Those permissions must be assigned separately, as discussed in the following paragraphs. The QuickBooks Administrator generally should be the only user with access to sensitive accounting activities.

Sensitive Financial Reports. Users generally should not be given access to sensitive financial reports (such as the balance sheet, profit and loss reports, budget reports, cash flow reports, income tax reports, and audit trail reports). That access allows users to create all reports and graphs available in QuickBooks. However, even users with access to reports cannot change or delete transactions included in the reports. That permission must be assigned separately, as discussed in the following paragraph. The QuickBooks Administrator generally should be the only user with access to sensitive financial reports.

Changing and Deleting Transactions. Even if QuickBooks users have full access in a particular area, they cannot change or delete transactions in that area unless they are given that permission in the “Changing or Deleting Transactions” window. For example, a user with full access in the sales and accounts receivable area cannot change invoices or sales receipts unless they are given permission to change or delete transactions. However, even if users do not have permission to change or delete transactions, they can change or delete transactions they entered in the current QuickBooks session so that quickly identified data entry errors can be corrected. Users that are given permission to change or delete transactions can alter transactions only in areas in which they have access. For example, users that have access to the inventory area but not to the payroll area cannot alter payroll transactions even if they have permission to change or delete transactions. The QuickBooks Administrator generally should be the only user with permission to change or delete historical transactions.

If a user is given permission to change or delete transactions in areas in which they have access, the “Changing or Deleting Transactions” window also asks whether the user should be able to change or delete transactions recorded before the closing date. The QuickBooks Administrator always should deny users access to such transactions by selecting “No” in response to that question. Even when “No” is selected, users can view prior-period transactions in QuickBooks areas to which they have access. If “Yes” is selected and the administrator sets a password, the user will be required to enter the password.

Viewing Data. QuickBooks allows the QuickBooks Administrator to limit a user’s access to creating sensitive financial reports or creating and printing sensitive reports. Companies can use this feature to allow the Controller, Chief Financial Officer, or another person independent of the accounting function the ability to oversee the accounting operations. Because many companies frequently have small accounting staffs, this increased oversight can mitigate some of the risk to the system of internal control created by having limited segregation of duties.

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Many home improvements are capital improvements. The Capital Improvements are tax deductible according to IRS if the home improvements meet a number of conditions. The home improvements are permanent addition to the home that increases the value of the home. Hence, the home improvements are substantial in which the value of home property appreciates, the life of home property prolongs, and the functionality of home property increases.

For example, placing a fence, adding a room, installing a driveway, implementing a swimming pool, installing a new roof, setting a new built-in heating systems are capital improvements.

The capital improvement increases the value of your home. For example, adding a new room increases the value of home. The new room increases the ability of the property to earn more income. Thereby, the value of home property increases as well.

Another example, adding a garage increases the value of home. Renters will pay extra for a parking space. And again, the new garage increases the ability of the property to earn more income. Thereby, the value of home property increases as well.

On the other hand, the home repairs are not home improvements according to the IRS. Repairs are expenses that keep the property in good repair. And, the rental property owner can claim the as expenses on the year that the expenses are made.

For example, repainting the walls, patching the roof, installing the wallpaper, replacing the carpet, sealing the links, and repairing the windows are home repairs.

To be able to claim capital improvement tax deductible, the homeowner needs to use the Depreciation Method. The Depreciation Method is a way to recover the cost of capital improvements through depreciating the expense over the life expectancy of property.

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Characteristics of Depreciation

Depreciation has the following characteristics:

(1) Depreciation is charged in case of fixed assets only, e.g., Building, Plant and Machinery, Furniture ‘etc. There is no question of depreciation in case of current assets-such as Stock, Debtors, Bills Receivable etc.

(2) Depreciation causes perpetual, gradual and continuous fall in the value of asset

(3) Depreciation occurs till the last day of the estimated working life of asset

(4) Depreciation occurs on account of use of asset In certain cases, however, depreciation may occur even if the assets are not used, e.g., Leasehold Property, Patent right, Copyright etc.

(5) Depreciation is a charge against revenue of an accounting period.

(6) Depreciation does not depend on fluctuations in market value of asset

(7) The amount of depreciation of an accounting year cannot be determined precisely-it has to be estimated. In certain cases, however, it may be ascertained exactly, e.g., Leasehold Property, Patent Right, Copyright etc.

(8) Total depreciation of an asset cannot exceed its depreciable value (cost less scrap value).

Basic factors of determination of depreciation

(1) original cost of fixed asset i.e., purchase price plus freight and installation expenses;

(2) estimated amount of expenditure on repairs during the useful life;

(3) estimated useful life of asset after which it will be discarded;

(4) estimated residual or scrap value;

(5) interest on investment-the amount invested on purchase of asset, if it had been invested in some other investment what interest would have been earned;

(6) possibility of obsolescence.

Fixed Installment or Original Cost or Straight Line Method, reducing/Diminishing Balance method

Under this method depreciation is not calculated on cost of asset. It is computed on the book value. of asset. The book value of the asset is obtained by deducting depreciation from its cost. The book value of asset gradually reduces on account of depreciation charge. Since the depreciation percent rate is applied on reducing balance of asset. this method is called reducing balance or diminishing installment method or written down value method.

Merits and demerits.

Declining balance method not only equitably matches depreciation expenses against the related revenue but also fairly spreads. the incidence of depreciation and repairs (viz higher depreciation but heavier repairs in later years.) on profit and loss account over the assets life span. Elimination of major portion of cost in early years also minimizes the impact of obsolescence. It is equally useful to management as accelerated depreciation means smaller taxable profits and taxes hence lesser outflow of cash.

Accelerated Depreciation Methods

Sum-of-the year’s digits (SYD). This method of depreciation accelerates depreciation expenses so that the amount recognized in the earlier periods of an asset’s useful life are greater than those recognized in the latter periods. The SYD is found by estimating an asset’s useful life in years, then assigning consecutive numbers to each year, and totaling these numbers. For n years,

SYD = 1 + 2 + 3 + 4 + … +n

Annuity Method

The method recognizes the time value (Interest) of money and hence regards the real cost of using a long-lived asset equivalent to the actual amount invested thereon plus the interest lost on the acquisition of asset. Under this method, so much depreciation is written off each year as after debiting the asset account with interest upon the diminishing value, will reduce the asset to nil at the end of its life. Thus, the amount written off as depreciation is the same every year, but the interest will diminish each year.

The amount of annual depreciation to be written off by Annuity method will be ascertained from Annuity Tables

Depreciation Fund method or Sinking Fund method

Under this method, a fixed amount is charged as depreciation every year. It endeavors to provide the required lump sum cash at the retirement of a long, lived asset by annually setting aside and investing a fixed sum in readily realizable securities. These securities earn interest at fixed rate and the same being reinvested along with successive fixed installments of depreciation, allowed to accumulate at compound interest. The sinking fund method thus takes into account of this probable income from interest while fixing the annual depreciation and investing the same which together with compound interest accumulated to the asset’s depreciable cost by the end of its useful life. Obviously, the fixed installment of annual depreciation is here smaller as compared to straight line method. Its magnitude, however, rests on the asset’s life span and interest rate. Longer the span and higher the rate, smaller is the annual depreciation per rupee of depreciable cost.

Shortcomings of Depreciation Fund Method

Depreciation fund method assumes constant rate of return on every periodic investment in identical securities. This is hardly true in this dynamic world where rates do vary now and then. Any variation in the rate of return upsets the earlier periodic allocation for depreciation and entails refection thereof. Further the amount realized on the sale of security rarely agrees with its acquisition cost owing to made fluctuations which may be both erratic and considerable. Those may cause a wide gap between the required and supplied cash.

Insurance Policy Method

This method endeavors the supply of required cash at the retirement of a specified asset in return of periodic contribution (premium). Under this a trader takes a ‘Capital Redemption Insurance Policy’ from an insurance company which undertakes to pay at a given date a certain sum if the trader, paying a fixed number of premiums after regular intervals. The trader treats the periodic payment as depreciation and charges it to profit and loss account. In this case, depreciation is charged at the end of the year, whereas, the premium is paid at the beginning of the year. At maturity, the insurance company pays the policy money which is normally sufficient to replace the retired set. Normally, amount received is more than total premium paid as the policy yields interest.

Revaluation Method

Under the system, each year the asset is valued and the value is compared with that in the beginning of the year. The fall is treated as depreciation. Suppose if the value of the tools at the beginning of the year was Rs. 8,000, during the year tools worth Rs. 6,000 were purchased and at the end of the year, on valuation these amounted to Rs. 11,000. The amount of depreciation for the year will be : 8,000 + 6,000-11,000 = Rs. 3,000 . This method is useful for charging depreciation on livestock and loose tools.

Depletion Method

Natural resources include physical assets like mineral deposits, oil and gas resources and timber stands. These natural resources get exhausted by exploitation. In some cases, the reduction in physical deposits is offset by growth or development of additional deposits.

The cost of natural resources is the price paid for its acquisition plus price paid for development of such asset in order to bring it to a state suitable for production.

The periodic depletion is better not calculated in terms of year. Rather it is better to calculate the cost per unit and then multiply the cost of unit to units produced in that particular year.

Machine Hour Rate

Under this method, the total number of working hours of a machine during the whole of its effective life is estimated, and then the cost of machine is divided by the expected number of hours of useful life, this gives the rate per hour. The annual depreciation is calculatedly multiplying this rate by the number of hours, the machine actually runs in a year.

Mileage Method

This method is used only for those assets whose useful life depends upon the fact that how many kilometers they have been driven e.g. buses, cars, trucks and rolling stock etc.

Global Method

Under this method, the value of the assets, irrespective of their nature is added together and depreciation is charged at an average rate on aggregated value.

Choice of a Method

Aforesaid methods of depreciation reveal that none is absolutely best or worst as each method has its own merits and demerits. Suitability of every method is relative and depends upon various factors. Most important of these are the type of the asset and purpose of depreciation.

Straight line method suits to buildings and lease etc.. reducing installment method fits to machinery equipment etc. and depletion method for wasting assets like mines. quarries etc. However, the underlying purpose is the basic determinants of the propriety of a depreciation method. Important purpose comprise of true reporting of accounts, tax benefits, comparative product cost, financial flexibility, replacement and expansion etc. For example. depreciation fund method envisages that the amount set aside for depreciation is to be invested outside the business in specific securities. Similarly under insurance policy method, the amount so set aside is handed over to insurance company. If a business is having working capital problems the advisability of these methods is questionable.

Of the above-mentioned methods (1) Fixed Installment and (2) Reducing Installment methods are most widely used.

Distinction between Fixed Installment Method and Reducing Installment Method

Fixed Installment Method

1. The rate and amount of depreciation remain the same each year.

2. Depreciation rate per cent is calculated on cost of asset each year.

3. At the end of its life the value of asset is reduced to zero or scrap value.

4. The older the asset, the larger the cost of its repairs. But the amount of depreciation remains the same each year. Hence, the total of depreciation and repairs increases every year. This reduces annual profit gradually.

5. Computation of depreciation comparatively easy and simple.

Reducing Installment Method

1. The rate remains the same, but the amount of depreciation diminishes gradually.

2. Depreciation rate percent is calculated on book value of asset.

3. The value of asset is never reduced to zero at the end of its life.

4. The amount of depreciation decreases gradually, while the cost of repairs increases.

So the total of depreciation and repairs remains more or less the same each “year. Hence, it causes little or no change in annual profit/loss.

5. Depreciation can be computed without any difficulty, but it is not so easy and simple.

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Leaf shredders are used to recycle yard and garden leaves into mulch. Shredded leaves produces fine materials that composts faster. Most common type of leaf shredders are electric leaf shredders. Advanced electric leaf shredders can shred more amounts of leaves into mulch in no time.

In electric leaf shredders, leafs are mounted directly on a trash container. They consist of a leaf bag liner for instant disposal. Most electric leaf shredders have heavy duty flexible double cutting lines. The large funnel in electric leaf shredders allow easy loading of leaves. They can convert as much as 8 bags of leaves into mulch at once. Most electric leaf shredders have built in carrying handles and are easy to transport. Electric leaf shredders are easy to assemble and maintain.

Advanced electric leaf shredders consist of a string trimmer unit built into the base of a large funnel. They have five shredding settings from coarse to super fine. These shredders can shred dry leaves as well as wet leaves. If the leaves are wet, they are fed into the machine slowly. Advanced electric leaf shredders can convert as much as 11 bags of leaves into mulch at a time. They can also process pine needles, grass clippings and thatch. Most advanced electric leaf shedders have multi position hopper adjustment.

Handheld leaf shredders are ideal for lawn maintenance. Most of them have quick release latches for easy conversion. They can work on tough lawn chores, tight areas and hard surfaces. Most handheld leaf shredders also feature comfort control grip and extension cord lock.

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Despite the vast improvements in information technology, computers (on which modern IT is based) cannot as yet take over business management. However, business information systems have transformed the effectiveness, power and efficiency of management.

In an earlier article on business management software, we looked at surface aspects of how modern management information systems help businesses. We saw how computers speeded up and improved the quality of operations. We also mentioned the existence of broad categories of business software – office suites, functional software such as accounting and inventory, and industry software such as retail management software. In this article, we seek to look more analytically at the role of information management systems.

Decision Support, Problem Analysis and Overall Control

Business managers often need to make decisions that can affect the business’ fortunes one way or other. For example, a company with sales outlets or distributors spread over a wide geographic area might want to optimize the logistical operations of delivering merchandise to the outlets. The best solution might be affected by numerous factors such as demand patterns, availability of merchandise, distances involved and the option of using external carriers (who can find two way loads and might prove a lesser cost option over long distances) instead of own vehicles.

While it might be possible to use complex mathematical formulas by hand to compute the best solution, computers transform the whole process into a routine task of feeding certain information as input and obtaining suggestions for best solutions as output. The task can typically be done in a few minutes (instead of hours or even days) and it becomes possible to examine several alternatives before deciding upon one that seems most realistic.

Identifying problems and analyzing the factors that cause them also has been transformed by modern computer information systems. In a typical MIS environment, standard reports are generated in a routine manner comparing actual performance against original estimates. The software that generates the report can be instructed to highlight exceptions, i.e. significant variations between original estimates and actual performance. Managers will thus become aware of problem areas in the daily course of their work simply by looking at the reports they receive, without having to do detailed data collection and computations themselves.

Identifying the factors responsible for the problem can also be routinized to some extent by using such tools as variance analysis. Variance analysis is an element of standard costing system that splits deviations from estimates (or standards) into causative factors such as increase in price of materials used, excessive usage of materials, unexpected machine downtimes, etc. With such a detailed report, managers can delve deeper into the problem factor, such as why there was excessive usage of materials.

Control is also exercised through variance analysis. Budgets are prepared for all business operations by concerned managers working in a coordinated fashion. For example, estimated sales volumes will determine the levels of production; production levels will determine raw material purchases; and so on. With good information system management, it then becomes possible to generate timely reports comparing actual sales, production, raw material deliveries, etc against estimated levels.

The reports will help managers to keep a watch on things and take corrective action quickly. For example, the production manager will become aware of falling sales (or rising sales) of particular products and can prepare to make adjustments in production schedules, and purchasing and inventory managers will become quickly aware of any mounting inventories of unused materials. MIS thus enhances the quality of communication all around and can significantly improve the effectiveness of operations control.

Effective MIS Involves Humans and Computers Working together

The major aspect to note is that MIS provides only the information; it is the responsibility of concerned managers to act on the information. It is the synergy between efficient, accurate and speedy equipment and humans with commonsense, intelligence and judgment that really gives power to MIS.

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