The Impact Of Budgetary Control On Job Performance In An Organisation Accounting Essay

The Impact Of Budgetary Control On Job Performance In An Organisation Accounting Essay The effectiveness of any budgetary system depends not only on the appropriateness of its technical characteristics to the particular organisation and environmental circumstances to which it is applied, but also on the way in which organisational participants make use of information that it promotes. It is a common place that budgetary system is often ignored, sometimes manipulated and even falsified by those whom it is provided to. Rosen and Sneck (1997) Lowe and Shaw (1968), Mintzerg (1995), and Yetton (1967) indicate that dysfunctional behaviour frequently stems from the fact that the budget information provided by the accounting system does not adequately match the complexity of the underlying organisation and economic events, but it is also evident that distortion of information can occur even when the budgetary system itself is technically adequate. Such distortion is a consequence of the divergence of individual goals from those of the organisation and most commonly manifests i tself in attempts to make budgetary reports reflect more favourably on an individuals contribution to the overall organisational performance. Budgetary control is very important in the management of an organisation because it helps in achieving organisational goals. Once the final budget is agreed to, it becomes a plan against which the actual cost, revenue and performance are periodically reviewed and compared with. Budgetary control is exercised by line management for control over cost through continuous appraisal of actual expenditures, using as a guide the planned costs as expressed in the budget. The principle is also applied to the various types of income and to items that affect the balance sheet, such as receivables inventories, cash, fixed assets, etc. Budgetary control is the preparation of targets or budgets for agreed areas of business. An area may be a functional management area e.g. sales, purchases or production it may be an agreed cost centre area, e.g. machinery assembly, planning which may consist of a machine, group of machines or a group of employees. Budgetary control, as such, controls nothing. Management has a control yardstick and when the actual results are compared with the budget figure management should be prompted into action. The information can assist in controlling operations and improving decision making budgetary control of it will control nothing. Budgetary control systems based upon financial measures are widely used in economic organisations. The principal designs for assigning financial responsibility in an organisation can be classified as follows: standard cost centre, revenue centre, discretionary expenses centre, profits centre and investment centre (Vanal, 1973). The order of this classification is from narrowest to broadest in terms of the decision making discretion permitted or required of the manager. Budgets are financial plans and provide a basis for directing and evaluating the performance of individuals or segments of organisations. Through a budget, activities of different parts of an organisation can be coordinated and controlled. A control system typically incorporates measures and techniques which conform to the responsibilities delegated to managers under the organisations structure. As the decision making authority is decentralised and parts of an organisation become more autonomous, managers will be responsible for more financial variables and financial control systems will be more complex in the sense that they will incorporate more variables. Budgets are potential means of influencing behaviour control is the successful exercise of power to influence behaviour available to an organisation. Two other primary means to influence behaviour are interpersonal contact i.e. leadership, and organisational structure i.e. the distribution of authority and work roles. This study focuses specifically on the relationship between formal properties of organisational structures and budgetary control. This is in contrast to other studies of budgeting which examined the relationship between interpersonal variables and budgetary control (Decoster and Fertakis, 1968, Foran and Decoster, 1974, Hopwood, 1974, Swieringa and Moncur, 1972 and 1975). Budgets in the organisation serve multiple roles of planning, evaluation, coordination, communication, and decision making. Participants in budgeting are another important issue because it reflects the degree of consensus, an important aspect of management style. Budgets require management to specify expected sales, cash inflows and outflows, and costs, and they provide a mechanism for effective planning and control in organisation (Flamholtz, 1983). The budget is a standard against which the actual performance can be compared and measured. Budgets are financial blueprints that qualify an organisations plan for a future period. Therefore, for the resources of the organisation to be effectively utilised, and for the objectives of such organisation to be achieved, the executive need to fully understand the importance of budgetary control. Research Questions What impact has budgetary control on job performance? Do budgetary decisions determine the future destiny of the organisation? In which specific ways does planning and control affect the organisation? What is the type of budgetary control used on the application? Do budgets represent an important part of the organisational motivation system? Rational To identify the planning and control system of the organisation. To examine the existing budgetary control system that affects organisation job performance. To outline the areas of budgetary control that requires further studies and problems encountered in carrying out such controls. To find out causes of workers per attitudes and how moral the budgetary system. To offer relevant recommendation that can help gear job performance in an organisation. Methodology The research design to be used in the collection of data would be primary and secondary source. The primary source would include personal experience, observation while the secondary source is the literature survey through the use of scholarly journals and relevant texts. The methods of data collection would be a self administered questionnaire. Limitations The study would be impeded by some inevitable circumstances like labour, transportation, as well as logistical problems in the process of data collection. Another limitation would be that the sample was therefore not strictly random or to convince the respondents to fill the questionnaire without delay. Definition of terms Budgetary control: it emphasizes the control of plans by comparing actual results to identify variances upon which corrective actions can take place. Budget: is a financial qualitative statement prepared and approved before a defined period of time for the purpose of attaining given objectives. Budget: the budget is a plan or target in qualities and/or money value prepared for a future period of time. Performance: is the assessment of individuals potential for future promotion. Organisation: Schein (1983) defines an organisation as the planned coordination of the activities of a number of people for the achievement of some common, explicit purpose or goal, through division of labour and function and through a hierarchy of authority and responsibility. Organisation: Robbins (1990) defines an organisation as a consciously coordinated social entity with a relatively identifiable boundary that functions on a relatively continuous basis to achieve a common goal or set of goals. Significance of study It is the aim of the study to have considerable significance in: exposing the real impact of budgetary control on job performance making significant recommendations to improve the budgetary system of the organisation inducing the leadership of the organisation to set up constructive budgetary programme to alleviate redundancy organisation cannot survive in isolation without individual supporting the effectiveness of the budget. Statement of Hypothesis The researcher formulated three hypotheses for this study. This is to determine whether the result of the research would accept or reject the hypothesis in question. Hypothesis one H0: Budgetary control is not significantly related to total organisational performance H1: Budgetary control is significantly related to total organisational performance. Variables involved are: Budgetary control Total organisational performance Hypothesis two H0: Budgetary control does not significantly and communication among top and lower management. H1: Budgetary control significantly and communication among top and lower management. Variables involved are: Budgetary control Avenue for communication Hypothesis three H0: Budgetary control does not significantly improve proper planning and control of operations in organisations. H1: Budgetary control has significantly improved proper planning and control of operations in organisations. Variables involved are: Budgetary control Improved proper planning and control Scope of study This study pays particular attention to the human aspect of budgeting which is the most complex, dynamic and unpredictable factors in the organisation This study will also learn stakeholders about the use of budgetary control as a means of effective organisational control and to make decisions that will improve the overall job performance of the company. Definition of the problem The coordination of efforts and activities of individuals in an organisation is to achieve the desired aims and objectives of that organisation has long been one of management most important, difficult and controversial problem. Organisations are established to achieve a set of defined goals, when an organisation is set up, the authority which established it also assigned certain budgetary functions. For those functions and objectives to be carried out the organisation has to carry its employees along. The following may pose problems: Which budgetary control system is in place and how effective has this helped the management in making decision? How has budgetary control helped in the application principles of: Planning and control Job performance Will budgetary control furnish a standard to management? for ascertaining the performance of different parts of the organisation? Historical Background of Budgetary Control? and Motivation. Budgetary participants relates to the involvement of managers in the budgetary process and their influence over setting of budgetary targets (Shields and Young 1993) the argument that managers participation in budget setting affects job related outcomes such as performance is premised on two explanations. First, models based on psychological theories suggest that participation is related to performance through identification and ego involvement with the budget goals (Murray 1990). This in turn leads to enhanced motivation and commitment to budget (Vroom, 1964, Brownell and Mclnnes, 1986). Second, from a cognitive perspective, participation is seen to improve the flow of information between superior and subordinates, leading to higher quality decisions (Lock and Schweiger, 1979, Shields and Young, 1993). Similarly, participation may promote better performance through facilitation of learning and knowledge acquisition (Parker and Wall 1998). There is evidence, however, that BP is not a lways beneficial. Previous studies have found that a variety of factors including perceived environment uncertainty (Gul 1991), job difficulty (Mia 1989), organisational structure (Gul, Tsui, Fong and kwok 1995) and budget emphasis in performance evaluation (Brownell 1982) may motivate the relationship between Budget Participation and managerial job related outcomes. For instance, Gul et al. (1995) found budgetary participation to be negatively related to managerial performance in less decentralised, (i.e. more hierarchical) situations. The role organisational culture perceptions, however has attracted only limited research attention. The importance of these perceptions was underlined in a three case analysis undertaken by Flamholtz (1983). Flamholtz (1983:168) concluded that if a firms culture and its core control system are not synchronized, it is not likely that even a well integrated core control system will actually influence behaviour in its intended ways. More specifically, managers in one of Flamholtzs (1983) cases described their organisational culture as being highly rules oriented and tradition bound and therefore felt that budgetary participation was only Pseudo. Therefore, when a zero budget cuts.

First impressions of Iago and Othello Essay

In the play Othello, our first impression suggests that Iago and Othello are portrayed as having somewhat opposite qualities. Iago is first shown to be false and pretentious. Even though he says â€Å"I will wear my heart upon my sleeve†, giving the impression that he shows all his emotions willingly, he is then shown to be quite secretive and deceitful, plotting against Othello, Casio and Rodriguo, emphasising his ambitious nature. Furthermore we get the impression that he is spiteful and racist, building up his hatred and jealousy towards Othello, â€Å"I hate the Moor†. We also get the impression that Iago is manipulative. Firstly, he promises Rodriguo Desdemona in return for his aid, luring him into his grasp using one of Rodriguo’s desires, â€Å"It cannot be long that Desdemona should continue her love to the Moor – put money in thy purse†. This effectively turns Rodriguo into a tool for Iago’s deeds. Following that, he uses his trust to manipulate Othello into becoming suspicious of Desdemona, and undermining his faith in his wife. Another one of Iago’s main features that we are presented with is that he is quite devious and cunning. He says himself: â€Å"I am not what I am†, and in his soliloquies he contemplates his cunning plans, â€Å"†¦ to plume up my will in double knavery. How? How? Let’s see†. Despite this, Othello still refers to him as â€Å"Honest Iago†. Othello, on the other hand, is shown to be a much more simple man, who is eloquent and much more admired. We get the impression that he looks for a sensible, balanced explanation for things. However his simple nature acts as a catalyst to produce many of his weaknesses. His lack of confidence in social situations causes him to become over-trusting and naà ¯ve, leading to his poor judgment. He does not suspect Iago at all, and overlooks the possibility that Iago may not be acting in Othello’s interest, referring to him as â€Å"A man †¦of honesty and trust†.

Possible Violation of the Eighth Amendment Essay

The article I found was written on March 14, 2011 about the controversy of the constitutionality of the treatment of Private Manning. There have been many articles about this topic, but the one I looked at was an editorial in the pages of the New York Times. Private Manning was convicted of leaking restricted military files to WikiLeaks and was arrested on the twenty sixth of May in Iraq. Since then he has been imprisoned at Quantico in Virginia and has been treated as the some of the prisoners at Abu Ghraib have. For example, he is in solitary confinement twenty three out of twenty four hours, on the twenty four hours his ankles must be shackled on the way to and on the way back from the exercise room. Finally, he is forced to sleep naked and when inspection comes in the morning, he is naked throughout that too; only when it is over is he permitted to have his clothes back. The controversy is whether this is treatment for cruel and unusual punishment; also known as the eighth amendment. I think this treatment of Private Manny may very well lead to a court case over the eighth amendment. In my opinion, there was most definitely a violation of the eighth amendment, I do not condone torture in any sense and consider not only despicable and disgraceful on American soil, but unconstitutional, and the treatment of Private Manning falls under this position. Being forced naked and in isolation for such extended periods of time is torture. Torture is cruel and, most definitely, unusual punishment especially considering the non-severity of Private Manning’s actions.

An audit is an examination - Free Essay Example

Sample details Pages: 14 Words: 4194 Downloads: 1 Date added: 2017/06/26 Category Finance Essay Type Research paper Did you like this example? Sarbanes-Oxley Act An audit is an examination and verification of a companys financial and accounting records. It also supports documents by a professional, such as certified public accountant. Until the 90s, the audits did not focused on controls like they do today. Don’t waste time! Our writers will create an original "An audit is an examination" essay for you Create order Because of the early 21st century scandals of Enron Corp, WorldCom Group Inc., and Tyco International the investors trust in the United States corporations started to diminish. These scandals occurred because the major accounting firms failed to detect fraud in their accounting audits and because of conflicts between ethics and loyalty held by the directors. In order to avoid corporate fraud and restore the confidence in financial markets the Congress signed into law the Sarbanes-Oxley Act (SOX) on July 30, 2002. This act created standards for corporate accountability as well as penalties for corrupt corporate behavior. The SOX established the creation of the Public Company Accounting Oversight Board (PCAOB). This board is composed of five members and it is responsible for oversight of financial statement audits of publicly-traded corporations and the establishment of auditing standards in the United States of America. â€Å"The SOX sets forth eleven specific reporting requirements that companies and executive boards must follow, and requires the Securities and Exchange Commission (SEC) to oversee compliance† (investorswords.com, 2009). The SOX requires that the Chief Executive Officers (CEOs) and Chief Financial Officers (CFOs) of all public companies, as well as foreign issuers with U.S., to certify quarterly and annual reports. It minimizes the â€Å"periodic filing deadlines from 45 to 35 days for quarterly reports and from 90 to 60 days for annual reports. The companies also have to report any deficiencies in internal controls to their audit committees and independent auditors† (SSRN). The members of the audit committee must be part of the board of directors and independent of corporate management. The audit committee is responsible for selection, compensation, and oversight of the corporations independent auditor. The audit committee must include a member who is a financial expert. A financial expert is defined as someone who has an un derstanding of generally accepted accounting principles, internal controls, financial statements, and audit committees and who has experience preparing, auditing, analyzing, or evaluating financial statements. The audit committee must approve of any services provided by the independent auditor, particularly those that are not directly related to the financial audit. These services must be disclosed in reports to the SEC. A corporations independent auditor must provide timely information to the audit committee about important accounting practices and policies adopted by corporate management. Debates between the auditor and management about alternative practices or policies are also required. Any disagreements between the auditor and management about these matters must also be disclosed to the audit committee. The auditor must attest to and report on managements assessment of a corporations internal controls. The auditor is responsible for examining the client firms internal contro l system and verifying that the system is adequate to provide reasonable assurance of reliable financial reporting information. The auditor expresses an opinion concerning managements assertions about its internal control system. This opinion is based on the results of the auditors assessment and appears in a report that accompanies the companys audited financial statements. This report is in addition to the auditors attestation concerning the financial statements themselves. A whistleblower is a person that brings up a misconduct or bad behavior of a company. With the enactment of the SOX â€Å"internal and external whistleblower protection has been extended to all employees in publicly traded companies for the first time. The provisions of Sarbanes-Oxley make it illegal to discharge, demote, suspend, threaten, harass or in any manner discriminate against whistleblowers. The passage of this act has created an environment in which many organizations have realized the importance of instituting ethics policies and codes of conduct to address issues related to unethical or illegal conduct†. (Santa Clara University, 2009) â€Å"Many private companies, although not legally required to do so, are improving controls and documentation using recommendations contained in the 2002 Sarbanes Oxley Law. Better governance procedures and strengthened ethics and codes of conduct are the other major reported benefits† (basel-ii-risk.com, 2009). This fact concludes that since the implementation of the SOX the disclosure of financial information has increased. SOX is one of the regulations that help a company and its auditors to be more ethical. As of today, wealthy companies need to have the confidence of the shareholders as well as the general public. Its very important to the government that public companies are regulated because of best practices and rules. This fact is very significant to help protect the economy. Management And Stockholder Wealth A stockholder is known as a shareholder. A shareholder is one that owns or holds shares of stock. Shareholder wealth is defined by the market value of the shareholders common stock holdings. Total shareholder wealth is the number of shares outstanding multiplied by the market price per share. Shareholder wealth maximization is impersonal and distant. It states a clear guide for managers to make decisions and to recognize the risk that joins each decision. â€Å"To maximize shareholder wealth, a company must earn more than its cost of common equity. How much it can earn will depend upon the nature of the industry and whether the individual firm can develop a competitive edge in its own market.† (Gillespie,2010) By identifying and analyzing the companys target market, shareholders can recognize potential opportunities for success and profitability. The shape of the economy also impacts stockholder wealth. When the economy is in an upward motion, shareholders tend to make more money. However, if in a downward motion, constraints are placed upon shareholders. Childs (1997) states â€Å"there are two things to consider in order maximizing the shareholders wealth: 1) earn a return above the cost of common equity, and 2) put more capital to work at that higher return. High earnings without growth can improve shareholder wealth, but this fact alone wont raise stock prices.† Earnings that are larger than the cost of common equity represent greater profit margins. As a result of putting more capital to work, the shareholders wealth will maximize. This action can be referred as distribution of capital. When financial managers distribute capital they must watch the changes of the return on common equity and they have to be aware of the risks they might encounter. Maximizing the shareholders wealth is the primary goal of the financial managers. This goal â€Å"assumes that managers operate in the best interests of stockholders, not themselves, and do not attempt to expropriate wealth from lenders to benefit stockholders. Stockholder wealth maximization also assumes that managers do not take actions to deceive financial markets in order to boost the price of the firms stock.† (Baker, 2009) It is assumed that managers with a primary goal of shareholder wealth maximization are able to make successful decisions for the long-term life of the company. They consider both the short and long term effect of decisions and as a result the market value of the company increases. Sometimes there are conflicts between the interests of the shareholders and the interests of the management. Historically, management avoided the possibilities of maximizing the stockholder wealth. Today management has to consider the shareholders in their decisions and try to achieve the success of the company and the shareholders. The company is motivated to maximize the shareholders wealth by stock option incentives. Stock option incentives are a type of e mployee stock option that can be granted only to employees and confer a U.S. tax benefit. It is very hard to have a balance that satisfies the management of a company and shareholders. Overall, the shareholder wealth is good for the company because it goes hand in hand with the profitability of the company. The Case For Social Responsibility And Ethical Behavior Social responsibility is the obligation of a business to make decisions and take actions that will improve the welfare and interests of society as well as the business. In other words, social responsibility is quite important to the society, business, and individual. In order to accomplish this obligation, businesses today have placed an emphasis on the environment and economic sustainability. Sustainability means to satisfy todays needs without compromising future needs. Social responsibility is a process where an industry invests back into society. For instance, the industry can provide donations, academic scholarships, employment, environmental programs, or promote the development of other businesses. â€Å"Companies are now challenged by stakeholders including customers, employees, investors and activists to develop a blueprint for how they will sustain economic prosperity while taking care of their employees and the environment.† (asyousow.com 2010) These ideologies contribute to the economic wealth of society and maximize a companys profit. Due to the contribution of economic wealth to society, a company takes on more of a human characteristic. Ethical behavior is the conduct that is morally accepted as good and right. In the workplace, ethical behavior refers to the manner in which an organization expects their employees to behave. Most organizations have formulated documents, referred to as codes of conduct or codes of ethics, which set out the accepted behaviors within the work place. There are six concepts that must be considered in the creation of a code of conduct: ethics, values, morals, integrity, character, and laws. These codes of conduct/ethic consist of a set of rules and regulations that the employees and the organization have to follow. A professional code of ethics is a promise to act in a manner that protects the publics well-being. A professional code of ethics informs the public what to expect of a company and its employee s. Codes of ethics must be specific enough to express the intended conduct. However, they must avoid being so authoritarian that the employees interpretation becomes an excuse for noncompliance. Also, codes must be general enough to avoid encouraging defensive management, where an employee becomes unable to act and make decisions fearing that any action will be unethical. â€Å"Establishing an ethical standard for business conduct involves more than a written policy. The most compelling support for an ethical standard is adherence to and enforcement of that standard by those who institute it, and by those for whom it is written. More than briefings and policies handed out to every single employee, our behavior, practice, and deeds are the foundation for creating an ethical standard and making it stick.† (bomi) The potential for unethical behavior in business is everywhere. Ethical dilemmas are rarely simple. Several conflicting issues may be linked, and several parties may be involved. The solution for an issue might be perceived as unethical to some while to others it isnt. This could be related to the fact that each employee has their own set of personal ethics that can spill over into the workplace. It is extremely important to have and implement codes of conduct/ethics. In general, an organization should be both socially responsible and ethical. To comply with the social responsibility each day many companies are taking measures to be more â€Å"green† in other words pro environment. Also, every time there is a disaster like the one in Haiti, companies find a way to help and motivate society. The generosity by these companies can be interpreted as its public image. A companys ethics will set an example to the employees and a challenge to the competition. Income Management (Income Smoothing) Income management is a decision making strategy used to intentionally manipulate a companys earnings to match or achieve pre-determined financial results. Income management can be confused with the illegal activity of cooking the books. Cooking the books is when companies, like Enron, manipulate their financial statements and reports the wrong numbers. Income management is â€Å"primarily achieved by management actions that make it easier to achieve desired earnings levels through accounting choices from among GAAP [generally accepted accounting principles] and operating decisions† (Thompson, 2010) The excessive use of income management can lead to financial fraud. Historically, different companies have incurred in financial fraud because they improperly recorded revenues, recorded uncollectible sales, hided losses and expenses. The primary purpose of this strategy is income smoothing. Income smoothing is one phrase commonly used to describe income management. Income S moothing reflects economic results as management wishes them to look. This results in lower earnings quality because net income does not represent the economic performance of the business for the period. Albrecht (2006) concludes that â€Å"There are two types of income smoothing streams naturally smooth and intentionally smooth by management.† Intentionally smooth management can be real or artificial. The real is when management restructures the ways of generating revenues to produce a smooth income stream. The artificial is when financial manager controls the income inconsistency over the years. This can be accomplished by shifting income from good years to bad years. Future income may be shifted to the present year or vice versa. In a similar manner, income can be modified by shifting expenses or losses from period to period. Income smoothing is a technique that has been observed in many industries. For example, the banking industry has accelerated their income smoothin g techniques by â€Å"excluding the reserve for loan-loss from Tier I capital, and by restricting the amount which applies even to Tier II capital, the new system reduces the potential cost associated with understating the provision for loan-loss during periods of low earnings.† (Rivard, 2003) Also it is â€Å"commonly observed in developing countries, but they may come at a cost in terms persistent poverty† (Dercon, 2002). Like any other financial technique, it has its risks. The abuse of this technique it can lead to bankruptcy and fraud, but on the other hand it can be rewarding to the managers and business. Financial Statement Ratio Analysis: What The Numbers Mean Financial statement analysis is a method that identifies financial strengths and weaknesses of a company by establishing a relationship between the balance sheet and the income statement. Financial statements are necessary to meet reporting obligations and for management decision purposes. An important tool of the financial statement analysis is the ratio analysis. The ratio analysis is a tool used to measure a companys profit performance. It is a calculation of the current years numbers compared with the previous years numbers. The ratio analysis can also be used to compare a companys profit performance versus its competitors. The ratio analysis is classified into four categories: profitability ratios, asset utilization ratios, liquidity ratios, and debt utilization ratios. Profitability ratios measure a companys returns over a time frame. A company should have the ability to earn profits and grow during a long time period. When a company has a positive profitability, it means that it is being successful. For example: Microsoft started in a car garage and now is one of the biggest profitable companies of America. Asset utilization ratios measure how quickly a companys turnovers are compared to its competency. They can also be used to evaluate how active are the assets. A company that knows how to use their assets effectively will keep their investors happy. By using their assets effectively, the company will earn more sales per dollar of inventory. Liquidity ratios measure the ability of a company to meet short term obligations when they are due. If a company is not able to meet short term obligations, it will have to file for bankruptcy. The current assets and liabilities of a company is the focus of liquidity ratios. Debt utilization ratios are used to evaluate a companys debt position with regard to its asset base and earning power. This measure gives an idea of a companys leverage along with the potential debt risk of its debt. The lower the debt ratio means that a company has low total debt in comparison to its asset base. The higher debt ratio means that a company is in danger of becoming insolvent and going bankrupt. Accounting for management.com (2010) states that the ratio analysis has five advantages: 1. Simplifies financial statements: It simplifies the comprehension of financial statements. Ratios tell the whole story of changes in the financial condition of the business. 2. Facilitates inter-firm comparison: It provides data for inter-firm comparison. Ratios highlight the factors associated with successful and unsuccessful firm. They also reveal strong firms and weak firms, overvalued and undervalued firms. 3. Helps in planning: It helps in planning and forecasting. Ratios can assist management, in its basic functions of forecasting, Planning, co-ordination, control and communications. 4. Makes inter-firm comparison possible: Ratios analysis also makes possible comparison of the performance of di fferent divisions of the firm. The ratios are helpful in deciding about their efficiency or otherwise in the past and likely performance in the future. 5. Help in investment decisions: It helps in investment decisions in the case of investors and lending decisions in the case of bankers etc. The different end users of these statement analyses will give different priorities to the statements. An experienced analyst will look at all the statements but with different degrees of attention. All of these statements are important to achieve the success and goals of the company. These statement analyses are also very important because they explain the status of the company to the investors. Operating Leverage Operating leverage is a measure of the extent to which fixed assets and associated fixed costs are being used in a company. The purpose of leverage is to find a way to increase the value or impact of a resource. â€Å"Operating leverage can substantially increase the size of the operation and the potential income from that operation. However, it also creates a substantially higher risk exposure because equity is spread thinly and the ability to absorb losses is reduced.† (Hofstrand, 2008) Operating leverage is more useful to the owners, because it shows them a percentage of returns rather than an index. The operating leverage is large in companies that have a high proportion of fixed operating costs in relation to variable operating costs. The higher the degree of operating leverage the greater the potential danger from forecasting risks. If a relatively small error is made in forecasting sales it can result into large errors in cash flow projections. A business that sell s millions of products a year is more independent on each individual sale. On the contrary operating leverage is lowest in companies that have a low proportion of fixed operating costs in relation to variable operating costs. An easy way to show the operating leverage of a company is the break-even point graphic. This graphic shows the relationship between the fixed and variable cost and the total revenue and cost. The break-even pint analysis holds very important information for the company and investors. Companies with large amounts of fixed operating costs have high break-even points and high operating leverage. Variable costs in these companies tend to be low and both the contribution and unit contribution margin is high. In other words, the higher the gross margin the more leverage the company will have. These numbers can help to analyze if a company is meeting its goals and to deduct if it is being successful. The less fixed cost a company has the more return it will have. Operating leverage is widely used in the farming industry. For example, operating leverage helps farmers decide if it is better to rent or buy the land. Usually a multinational companys income is so high that they can increase it by expanding to other parts of the country and maintaining the low profit facilities. Operating leverage is important to small and large industries because it helps them to make better decisions and it gives them the necessary information of the operations profitability. Financial Leverage Financial leverage is how much the company use borrowed money instead of the equity of its operations. The higher the debt a company has the greater the financial leverage. In other words, it indicates the quantity of debt a company use in its capital structure. Capital structure is the relationship between assets, debt, and equity. â€Å"Leverage allows greater potential returns to the investor than otherwise would have been available but the potential loss is also greater because if the investment becomes worthless, the loan principal and all accrued interest on the loan still need to be repaid.† (Pandey, 2010) Financial leverage is very important for managers in the decision-making process of investing in operations. Financial leverage can maximize the stockholders wealth by increasing debt and equity. â€Å"A low cost debt with low interest would increase the return of equity relative to the return of assets.† (Scott, 2010) On the other hand, it is not good for the company to have a high debt because it diminishes the return of equity. Companies that are high in financial leverage might find it difficult to make payments on their debt in times of trouble and also difficult to borrow money from lenders. â€Å"Financial leverage can be used for stimulating profit and growth, but it is more likely for companies in the stage of birth and youth.† (Johns, 2010) Two companies may have the same operating leverage, but the use of financial leverage can be different. The stimulation of profit and growth of the companies will be different. That is why companies compare the effect that different plans might have in the companys earnings. Like in operating leverage, the plans will cross at some point. Beyond that point managers can decide which plan will give them the best earnings. The degree of financial leverage helps managers to analyze which plan has more leverage. The plan that has the larger financial leverage is the best option for t he company because they will have better earnings per share. Financial leverage is good to a certain point. It is true that it can maximize the stockholders wealth, but the higher the debt the larger the financial risk. It also can influence other innovative decisions, like changes in technology and other expanding chances. Financial leverage is one method that can be used in combination with others to achieve and improve a companys profitability and market value. Determining The Correct Mix Between Debt And Equity Financing Debt financing is money borrowed from a source with the agreement that it will be paid back in a certain time. In other words, this is a loan. This type of financing can be made in two ways which are short term (less or equal than one year) and long term (more than one year). â€Å"The lending party does not gain ownership of the business.† (Valdez, 2005) Some lending institutions require small business to guarantee the loan. Debt financing has its advantaged and disadvantages. The advantages of debt financing are maximum control of the business, the interests are deductible, and the debt will end after period of time. The disadvantages are the interests can be so high that it will be hard to pay back, the investors may get scared by the debt, and lenders will look closely at the business. Equity financing is an exchange of money for a piece of ownership of the business. This money is introduced directly to the operations. It is a form of financing that does not involv e debt. There are many sources of equity financing that include personal savings, investments by relatives, friends, employees, or other business partners. The most common source, however, are professional investors known as venture capitalists. Venture capital is a private equity given at an early stage of a business. The advantages of equity financing are the ability to receive money in exchange of equity, no monthly payment required, and the cash flow can be used to improve the business. On the other hand, its disadvantages are the loss of interest of the investors and the loss of ownership. If the business is a partnership â€Å"this type of financing would likely be in the form of an owners contribution and would appear on the balance sheet as owners equity. If the business is incorporated anyone contributing equity capital would receive shares in the business.† Equity financing allows the operation to consider further debt financing in the future, if needed. Increasi ng equity improves the business operations security in most cases. Convertible debt is a mix of debt and equity financing. It starts as debt financing, and as the business grows it changes to equity financing. Convertible debt is a loan that can be changed into equity if theres future financing or if the lender decides to change it. If venture capital is expected to be needed in the future this is a good alternative. This option eliminates the need of a appraisal of the company. â€Å"Convertible debt eliminates the risk of a down round (an investment round with a share price lower than the previous round).†(Advani, 2006) The investors can receive a discount off the share price negotiated by the lender. The decision of what type of financing will diverge depends on the type of company and expectations. Business owners need a good knowledge of the options that are available in order to choose between debt or equity financing. It is a smart move that they search for an ex pert opinion to give them guidance. A small company will prefer debt financing versus a big company that will prefer equity financing. A company that has big expectations and projections of growing may consider a convertible debt.