Financial and Managerial Accounting - Research Paper Example

?FINANCIAL AND MANAGERIAL ACCOUNTING Table of Contents Table of Contents 2 Introduction 3 Allocation for infrastructure development 4 Setting specialeconomic zones 5 Providing subsidized loans and other services 7 Setting up of health care facilities 9 Allocating federal funds for public school facilities 10 Development of recreational facilities 12 Capital budgeting 13 Conclusion 13 Reference 15 Bibliography 17 Introduction A project, be it a development project for a city or a corporate project relating to new installations and acquisitions, requires huge sum of money. Therefore, it is important that a proper assessment of the various possibilities is done to ensure its success. Considering the scarcity of the available resources it is important to evaluate whether the project is worth investing or not. In other words it is important to gauge the viability of the project. This can be done using capital budgeting techniques like Net present Value, Internal rate of return, Payback period etc (Murray State University, n.d.). The future cash flows are discounted using the required rate of return to see if the project is profitable i.e. it gives ‘value for money’. Only if the project has a net positive cash flow i.e. there is a gain even after paying for the cost associated with the project, it is worth investing. The strategic planning involves integration of a company’s decisions with respect to future business activities which include capital investments and operational activities. The operational requirements can be evaluated by perusing the budget requirements (Sagner, p.114). With regard to the city project the operational requirement will require an adherence to the federal standards. This will help in raising the amount of total funds allocated towards the city project from the current level of $10 million to $20 million. A strategic plan involves using the set budget in the most efficient manner so that all the infrastructural needs of the city are taken care of, providing various economic incentives to the new private companies etc. This can be in the form of tax waiver for the first 10 or 15 years; giving funds at cheap interest rates; relaxing the regulatory norms so that the businesses can focus their attention only on the work related activities without having to bother about clearances from various bodies. However, this does not come for free as this will require setting up adequate departments to facilitate cordial operating conditions for the new businesses and fast-tracking certain activities. All this will require funds and so it is important that a proper plan is drawn as to assess the amount of cost that will go towards such activities. Besides it is important to assess the net impact of these investments from the financial as well as social point of view. Thesis Statement- The budgeted amount has to be spent in a way that it can result in an all around development and growth of the city. The local authority plans to allot this amount for infrastructure development, educational programs, creation of Special Economic Zones (SEZs) etc. Allocation for infrastructure development The population of the city is not very high. The city is distantly located from the country capital. The infrastructure of the city is not very developed which is perhaps the main reason that the city lacks a business set-up. To make the city attractive to the business community it is important that suitable infrastructure is in place. In the absence of this the business may not be able to function smoothly. A well laid down road and rail services helps in connecting the remotest corners with important business locations in other parts of the country. Only if a business finds the infrastructural facilities in a city to be proper they invest otherwise they may not take the initiative. In some cases big business houses form an alliance with the local government to develop the necessary infrastructure. But this may not be feasible for small private companies as they have limited resources. In this case the local government has to take the initiative for infrastructure development. However this involves huge expenditure. This would mean that a significant portion of the fund earmarked for the city will go towards infrastructure development. Besides upgrading the facilities for the city it will also create new employment. This is likely to have a positive impact on the societal development of the city as well (Dayananda et al., “Qualitative factors in project evaluation”). The additional employment would translate into surplus income for the local people. This will help in improving the standard of living in the place. With the increased demand for goods and services as a result of the renewed demand more number of businesses will flock to the city. This shows the impact of planned infrastructure on the development of the city. Besides ensuring an all around development the government can generate additional revenues in the form of toll tax, parking fees etc which will add to the fund corpus of the exchequer. This amount can be further invested in infrastructure maintenance such that the government is never burdened with any costs. Therefore the funds allocated towards city infrastructure are one time in nature but the possible benefits derived from the same can be enormous. It will improve the image of the city and make it a lucrative business destination for the businesses. The potential benefits that can be obtained from this like rising employment, increased income, image makeover etc can raise the city’s revenues. The funds allocated for such investment is likely to be in the range of 40 percent to 50 percent. It will have long gestation periods but can result in more or less certain cash flows as the businesses are continuously on the look-out for new destinations. Infrastructure is the first thing that they look into at the time of setting up new units. Setting special economic zones Once the infrastructure is in place the local authority can work towards setting up special economic zones. Generally, these zones encompass areas that have tremendous growth potential but have not been tapped by the business sector on account of some hurdles like connectivity problems. With proper rail and road network the place becomes accessible. Despite this the businesses have to be induced in the form of various financial incentives. The local government can grant exemption from excise duties imposed on material, capital goods, etc procurement from the local market. This would mean that the revenue of the government will fall as this duty forms an important part of indirect taxes. Other than this the local government can exempt the income tax for the businesses willing to move to this zone. A tax holiday for a period of 15 years can be given. A faster clearance of the regulatory formalities can be allowed. This would require establishing necessary departments who can look into the various aspects starting from inviting a business enterprise to set up units in the special economic zone; explaining the necessary benefits to them; providing cheaper fund access etc. Therefore the local government has to set aside some amount of money for taking care of the tax exemptions and duty waivers. These would amount to revenue loss for the city which can come in the way maintenance plans of the city. In view of this it is important that the local government earmark some funds for the maintenance work as the exemption benefits given out to the businesses will not come in the way of development and city maintenance. The establishment of necessary departments to look after the various functions of special economic zone also calls for funds. The department has to hire people with an experience in interacting with the businesses in such matters. The cost of these people has to be initially borne by the local government. Once the businesses start showing interest in the region then this will create newer sources of income for the city. It is just that the local government has to take the necessary initiative to facilitate the setting up of businesses in these zones. Again it is difficult to forecast the future cash flows from such activities with certainty. But it has been seen that government across the countries announce for such schemes. Besides creating new jobs the new businesses can tap the unutilized resources available n the region (United States Agency for International Development, “OBJECTIVES”; City of San Diego, “Enterprise Zone Incentives”). The city has huge mineral reserves and the attraction of the new businesses will facilitate the utilization of the natural resource. However, the exploration of such resources requires huge amount of money. The local government generally funds the development and maintenance work of the city through indirect taxes and other such sources. If it plans to waive some of the taxes levied on the businesses in order to attract new businesses then this would call for setting aside at least 20 to 30 percent of the fund corpus for such benefits. Other than this it will also take care of the tax incentives or tax breaks announced for the establishment of the special economic zones. Providing subsidized loans and other services The business, planning to invest in the city, may not have surplus funds and this is another area where the government can step in to assist them. The small businesses cannot flourish without the financial assistance of the local government. This requires the government to grant easy and cheap credit to the small scale companies. Usually, the government gives loans to the corporate a certain percentage above the basic prime lending rate (PLR). This may become exorbitant for the small businesses. In the absence of fund availability many business ventures have not been taken up in the city. This highlights that the local government has to take the necessary intervention in this regard. In this aspect the government can allow cheaper credit access to the private companies with plans to set up units in the city. The local government can direct the local financial institutions to provide loans at less than the prevailing market rate. The difference between the market rate and the rate at which the finance is granted can be compensated by the local government. The private company may not be able to make substantial profits for the first few years of operation. This is because in the initial stages it has to spend extensively on promotional expenses and capital assets. It has to spend heavily in the purchase of machines and equipments. Therefore, the government can allow grace period of four or five years during which the company need not pay the loan instalments. After a gap of four or five years the company is expected to start reaping profits and would not have any difficulties in making loan repayments. Again, this money will also come from the fund corpus allocated for the development of the city. Other than providing loan at subsidized rate of interest the government can also facilitate cheaper availability of the production materials and equipments. The government can supply the materials that are locally available at less than market price. For equipments that are indigenously available the government can offer instalment payment facilities so that the company is not burdened with high fixed costs in the formative stages of its operation. A company may require advanced equipments that may not be available locally. In such cases the government can waive the import duties. It has been seen that the companies have to pay high import duties if they procure any plant and equipment from overseas locations. These import duties raise the cost of acquisition of these equipments often making it unviable for them to opt for overseas acquisitions. If the government can support the company by way of duty waiver they will be able to produce quality goods at cheaper prices. This will give the company a competitive edge in the market. In fact if the company can promote itself at the global level it can export the surplus goods to other countries. The competitive prices of the goods will give the company an edge over the other market players in the industry. The company will have twin sources of revenue one the local market and the other the international market. This shows how with little financial stimulus from the local government in the initial stages can transform a local company to a global entity. The export services would mean additional production activities in the city resulting in increased employment and improved standard of living of the people. Buoyed by the benefits of subsidized availability of resources like land and capital resources the companies from other locations will also get lured to the city. Considering the immense long term benefits that the city can derive from these efforts it is important that the government sets aside some amount of the fund corpus for this particular purpose. The amount that can be earmarked for this purpose can be in the range of 15 percent to 25 percent. Setting up of health care facilities The establishment of a proper healthcare facility forms a part of the basic amenities of city life. It has been seen that even the people living in the rural areas rush to the urban locations when they are in need of medical facilities. Therefore it is important that the city has a proper health care centre equipped with all the latest medical equipments. The city already has a health care facility but the number of beds is not adequate. The health unit is funded by local government hence the visiting fee is waived for the patients. The health centre charges only for medicinal expenses. But some of the local people often have to travel to other cities for some medical examinations. The health centre does not have adequate medical equipments required in the case of life threatening diseases. This causes a lot of inconvenience to the locals. As the health centre is primarily government funded the onus is on the government to develop this into a full fledged health unit equipped with all the modern equipments so that the patients do not have to rush to other cities for treatment. This will require monetary assistance from the government. The government set aside some portion of the capital funding somewhere in the range of 15 percent to 20 percent for this purpose. Initially the government can arrange for import of advanced medical equipments so that the inconvenience caused to the patients is eased to some extent. To make the health centre self-sufficient the government may allow the health centre to charge for such tests. The people of the city rush to other cities for medical examination of some diseases. This means that other than medical costs an individual has to bear travelling expenses also. Therefore, the people in the city may not mind paying for such tests in the city itself as at least they will be able to save in terms of travelling costs. Moreover the revenue obtained from these sources can be allocated for free treatment to the needy. This means that the local government must set aside at least 15 percent to 20 percent of the funds for the development of the healthcare facilities ion the city. Allocating federal funds for public school facilities The government can initiate educational projects such as modernization of the existing building and some maintenance facilities. This will involve hard as well as soft costs. Hard costs include the costs associated with materials and labour and soft costs examples are assessment and management of project, cost of design and planning of the building. The Department of Education in the country makes an average annual contribution of 8.2 percent towards the operating costs of public school. These costs are mostly spent on the salaries and other student promotional programs. Most of this cost is actually borne by the state as the contribution of the federal government is very meagre. For an educational investment of $1000 by the state the federal government contributes merely 86 cents (Figaro & O’Donnell, “Dedicated Federal Grant Programs for Public School Facilities”). As a part of the educational program the local government can grant funds for the improvement of the canteen facilities in the public schools. Besides this the local government can provide the necessary funds for the improvement of the cafeterias in the schools. The city already has a number of schools offering primary education facilities. Therefore the government need not worry about this aspect. However the higher education facilities in the city are limited. Many city students have to move to other metropolitan cities to get admission in the advanced finance courses. The city has higher educational facilities for the science stream but does not have institutions specializing in the finance courses. Therefore, the onus is on the government to set up educational institutions offering specialized finance courses. For this the government can either establish such institutions or it can ask the institutions in other parts of the country to set up centres in the city. So this would not require much monetary funding by the local government as the fees charged by the institutions is high and is enough to take care of their operational expenditures. The ensuing benefit will be that the city students do not have to face the trouble of going away from their homes to study. An important area where the government can offer assistance is grant of scholarships. This would be based entirely on merit with the scholarship amount ranging from 50 percent to 100 percent of the course fees. So here the government has to set aside some amount of the funds say 10 percent to 12 percent for the scholarship programs. With the advanced finance courses the city may soon feature in the top list of the corporate looking for finance professionals. This will be a huge boost to the image of the city. With time it is expected to emerge as the most coveted destination for finance students. Development of recreational facilities A beautiful city with well maintained parks, monuments, historical place etc can be an attractive tourist destination. The local government has already allocated land for this purpose. However, due to fund scarcity the government has not been able to upgrade this facility. With the previous fund allocations the government installed some benches in these parks but it could not materialize plans for the development of a garden. In fact there is one more children’ park but this does not match as per its name as the swings and rides are yet to be installed in this park. This has deprived the children in the city of an evening recreation. It is the duty of the government to finish its incomplete tasks in the city. The local government has already spent on the land and space for recreation, now what is required is the maintenance and development. The government can keep some fund aside for the creation of garden in the parks. By way of this the park can be an attractive place for the elderly as well as the young. It is just that the government has to spend initially as for the upkeep and maintenance of the park the government can charge a nominal fee from the park visitors. So the government will not be burdened with the development costs as the proceeds arising as park fees can be used for this purpose. The city has important historical places but this has failed to attract much attention as the local authorities have long neglected it. It has been seen that the historical places can attract tourists to the city. In fact some of the cities have a thriving tourist industry due to such historical places and monuments. The local government can also take a leaf from their books by spending towards the upkeep of places with historical eminence. All these endeavours are likely to cost nearly 10 percent to 20 percent of the budgeted amount. The cost are one time but once developed they can serve as a perennial source of revenue for the government. Capital budgeting The success of a project is measured in terms of cash flows it is able to generate. This is computed using capital budgeting techniques like NPV, IRR and Payback period. If a project generates net positive cash flows or the return generated by it is more than the pre-set rate of return then a project is said to be profitable (TIMEWEB, “Discounted Cash Flow Methods”). However, in the case of projects initiated for the infrastructure development, educational facilities, setting up of SEZs etc are difficult to estimate with certainty. Therefore the probable benefits from the same can be gauged by the employment creation, increase in income, and improvement of living standard of the people. Conclusion The main agenda of the budget earmarked by the local government includes development of infrastructure; offering incentives to new private companies; subsidizing the necessary resources ranging from land to capital; creation of SEZs; betterment of health and educational facilities etc. It is difficult to forecast with certainty the amount of anticipated future cash flows but one can forecast the benefits derived from these efforts by the society. If the proposed activities are carried out by the local authority then there are a number of benefits that are likely to ensue. The new companies are likely to create more employment opportunities. With the rise in the employment the income level and the per capita income of the city is also expected to move up. This is expected to have a very positive impact. The increased income sources would lead to increased demand. To meet this there will be additional production. The increasing production is expected to attract new industries to the city. The percentage to be allotted for various areas like infrastructure, new business, establishment of SEZs etc has been earmarked depending on the need of the level of development. A considerable amount is needed for the economic incentives to be given to the new private companies to lure them to the city. This is partly because most of the resources in the city are still unutilized and mainly because ‘industry’ is said to be the backbone of development for a city. Once the business environment in the city is elevated to the desired levels there will be no dearth of funds for other development work. The industry can take care of the fund requirements required for further growth and prosperity of the region. Reference City of San Diego. Enterprise Zone Incentives. No date. Business Assistance. January 28, 2011. . Dayananda, D. Irons, R. Harrison, S. Herbohn, J. Rowland, P. Qualitative factors in project evaluation. 2002. Capital Budgeting. January 28, 2011. . Filardo, M. O’Donnell, S. Dedicated Federal Grant Programs for Public School Facilities. 2010. FEDERAL SPENDING ON PK Read More