Importance of Share Holder Value in any Company - Research Paper Example

MANAGEMENT REPORT TABLE OF CONTENTS I. Importance of share holder value in any company -------------------------------------- 3 II. Benefits of cost reduction for the company -----------------------------------------------4 III. Strategies to reduce the tax liability & other expenses ------------------------------- 6 i. Change in rate of depreciation ----------------------------------------------------- 6 ii. Capitalizing the lease Assets -------------------------------------------------------- 7 iii. Increase in usage of Debts -----------------------------------------------------------7 iv. Increase in Cost of Goods sold ----------------------------------------------------- 7 v. Purchases in bulk quantities ------------------------------------------------------- 8 vi. Structured the staff salary ---------------------------------------------------------- 8 vii. Computerization of Accounts & Management Information System.------- 8 viii. Budgets another effective tool ------------------------------------------------------ 9 ix. Borrowing of funds at lower rates-------------------------------------------------10 x. Resource allocation at optimal------------------------------------------------------10 xi. Advance payments deferred to next year-----------------------------------------10 xii. Accelerating reductions-------------------------------------------------------------- 11 xiii. Deferring revenues from disputed Sales------------------------------------------ 11 xiv. Correcting errors in fixed assets --------------------------------------------------- 11 xv. Deducting research & development costs-----------------------------------------12 IV. Conclusion------------------------------------------------------------------------------------12 V. References -------------------------------------------------------------------------------------14 I. IMPORTANCE OF SHARE HOLDER IN A COMPANY Basically a share holder is the person, providing equity capital to any company and in return owns the company to the extent of his shares. As the partial owners, the stake holders share the profit and losses of the company in proportion to their share. As the share holders are the legal owners of the company, therefore management has the fiduciary obligation to act in the best interest of the share holders. Stock holders are often called shock absorbers as they provide risk capital to the company. The stock holders cushion the claims of other stake holders. The value of any company can decline by as much as the value of equity capital. Without share holders and their equity, the companies would have all been financed by debts and would continuously face financial anguish which results in liquidation or bankruptcy. The shareholder value approach favorable strategies, by compelling managers to review business strategies based on prospective cash flows. The more company ability to generate cash, the more it can distribute to its share holders. In short maximizing share holders wealth is equivalent to maximizing company’s price In order to attract the capital equity easily, many companies focus more on establishing share holder value. Capital equity is especially sensitive in those companies which are seeking to grow, and operates in a risky environment. II BENEFITS OF COST REDUCTION FOR THE COMPANY: Every business profit is calculated by deducting expenses from the business incomes. The profit margin varies from business to business as the nature and size of the business requires different kinds of resources. The business needs resources for its development and each of this development has a cost to bear. No matter what type of business is your need human and financial resources needed to establish it. It is utmost responsibility of management of any company to provide quality resources at reasonable costs because they play vital role in the business. Basically reduction in costs or expenses leads to the increase in the current income. Increase in current income means high profit margins. High profits margins brings high yield for the Share holders in the form of dividends and capital restructuring. It not only strengthens the company’s position but also boost up investor’s confidence. Further more the more profit margins’ means the company’s pay back position is strengthening. The company can pay of its liabilities easily and it ultimately accelerates the growth of the company. However it should be considered that the reduction of costs or expenses can not be incurred over a night. It’s a long and steady process and can be done with continuous management interest and efforts. Another important thing which needs to be considered is that the development of any company needs devotion of higher management. And that’s how it brings fruits to the Share holders. And Share holders ripe the benefits of their share in a long way. Many companies at times try their best to increase their share holder value but their policies fail. The reasons can be: 1) Exposing Capital Base to Risks: Many companies try to enhance their share holders return or value by risking the equity base. This results in the loss of the value of its shares. Which is highly risky and that’s why managers fails to produce high yields for the share holders. 2) Bad Strategy: Mostly the Management fails to under stands the strategy which is in the best interest of the company. Any incomplete strategy accelerates the risks while reducing the share holder’s yield. 3) Higher Risks supposition Higher risks supposition may leads companies to insolvency. This can reduce the share holder’s value. So it should always kept in mind a good strategy can leads to fruitful results. And a share holder’s yield can be increases and vice versa. Management should also consider that it costs very low to earn profit. Reduction in any type of costs/expense is very important for emerging as well as established business. Sky-scraping costs and expenses can results in decline of the business very early. So the management should carefully increase its expenses. There are several strategies and tools to reduce your business costs. Some of them are: III STRATEGIES TO MINIMIZE TAX LIABILITY & OTHER EXPENSES TO ENHANCE SHARE HOLDER VALUE: In order to increase the share holder return, strategic planning needs to be done. The objective of the management should be: 1) Reduction of costs and expenses while maintaining sales and revenues. 2) Add to revenue share and decline the cost. 1. CHANGE IN RATE OF DEPRECIATION: The most effective strategy to reduce the tax liability is to increase the rate of depreciation of all fixed assets. By straight line method, declining or double declining the cost of depreciation increases which ultimately increases the total expenses resulting in low income on which tax liability to be paid off. In this way we can reduce our Tax liability. Another method is by increasing the salvage value of the assets, the amount of assets increases which needs to be depreciated. The total amount of depreciation that should be taken over an asset’s service life is the assets cost minus its estimated salvage value. Depreciation is the process if allocating and charging the cost of the usefulness for the accounting periods that benefits Another strategy needs to be adopted, is by reducing the no of years / time on which assets needs to be depreciated. This will overall increase the depreciation cost in a given year. This ultimately results in low income and low tax liability. 2. CAPITALIZING THE LEASE ASSETS: Another strategy used to decrease the tax liability is to capitalize all those assets which a company purchased on lease. This will increase the cost of the company which results in low income and low tax liability. 3. INCREASE IN DEBT: Another important strategy is to increase the debt by the company, the more the company use debt, the interest rate will be high, resulting in high return in equity. The leverage ratio will be high. The more the company increases its financial debts the more company is required to pay the interest rate. The more interest rate increases the total expenses. This results in low profit. Low profit means low tax liability. 4. INCREASE IN COST OF GOOD SOLD : When the price of inventories increases, the goods are inventoried at LIFO method. It will increase the over all amount of cost of goods sold. This will result in low profit and low tax liability which in return give advantage to shareholders. LIFO method is basically a method of costing in which the raw material is placed in the ware house. It includes the technique that those items which were last entering in the store registered are issued first for the production purpose. LIFO method is an effective tool to boost up the cost of goods sold which results in high costs and low profit. Low profit yields to low tax liability. 5. PURCHASES IN BULK QUANTITIES: In order to purchase goods in bulk quantities it reduces the business cost. This again in return brings high income and high return on equity. When a company purchases raw material in bulk quantities, the seller usually give discounts to its valuable customers. 6. STRUCTURED THE STAFF SALARY: The staff salary is no doubt another important & major non financial expenditure. In order to give their employees best the salary structure should be attractive at the same time in should be inline in accordance with overall financial position of the company. Its is very important to chose the right person for the right job on right time. Further more those employees who are not performing well becomes the liability for the company. So it is very important to always hired experience persons it not only reduced the cost of training but also increases the productivity. 7. COMPUTERIZATION OF ACCOUNTING & MANAGEMENT INFORMATION SYSTEM: It is very important that the company’s management accounts and information system are computerized. It not only saves time, but also increases efficiency. Further more it ensures accuracy, provides security. It also facilitates the monitoring act ivies and portfolio tracking. This in results improves the system as whole. It also generates efficient fund management, and provision of analytical and reporting option at comparative costs. This over all benefits the company. Effective planning and controls over the operations depend upon accounting which provides management in detailed statements of the actual cost of material, labor , factory overhead and other marketing and administrative expenses. 8. BUDGETS ANOTHER EFFECTIVE TOOLS: Planning is a management responsibility of critical importance to business success, and budgeting is the process used by the management to formalize its plans. Budgeting promotes study and research by management and focuses its attention on future. Budgeting also provides a basis for evaluating the performance, serves as a source of motivation, is a mean of coordinating the business activities, and communicates management’s plans and instructions to the company’s employees. Budgets always prove as a best tool in controlling the cost of the company especially in manufacturing concerns. Budgets should be given to the management and a continuous analysis with the actual cost should be done at the end of every quarter. And a variances should be note down so it given the discrepancies of the management. It is mandatory to constantly compare the cost and the returns in order to reach the break even points as earliest as possible. Effective planning and controls over the operations depend upon accounting which provides management in detailed statements of the actual cost of material, labor, factory overhead and other marketing and administrative expenses. Comparisons and analyses of these actual costs with estimates and standard prepared in advance of production and sales enable management to identify the reasons of any differences. Management can then formulate intelligent production plans and sales policies for achieving the organizations objectives. Budgets most of the times provide a tools to verify the variances actually incurred. This helps the management to rectify their short term strategies and to develop new and advance technique according to the time & needs which helps in curtailing extra cost and results in high profits. 9. BORROWING OF FUNDS AT LOWER RATE: The strategy for borrowing of funds with lower rates of interest from different sources is another technique of cost reduction. Always use savings for lending purpose . The investment of idle funds on right time decreases the cost of funds. This ultimately results in increase in share holder’s value. 10. RESOURCE ALLOCATION SHOULD BE OPTIMAL: Another important technique of earning high for the share holders is allocation of the resources in best possible way. The company human and capital resources should be utilized in such a manner, that it not only brings high yields but reduces the wastage of such precious resources in one way or another. 11. ADVANCE PAYMENT DEFERR TO NEXT YEAR: Another technique used to reduce tax liability in a given year is by deferring portion of their advance payments to subsequent year. Many firms which engaged in technology business receive a major amount of their revenues in this form. 12. ACCELERATING DEDUCTIONS: Many companies can use technique of accelerating the different types of deductions into preceding year which enable them to benefit earlier. Deductions from employment taxes are included in it. Companies with large number of employees such as large call center or technical support centers have a good strategy in order to reduce its overall costs. Other deductions a company can accelerate are different types of compensation, including bonuses and vacation pay, and insurance, taxes, rebates, refunds, warranties, service contracts in expense category. Many of such changes require advance will where as others requires automatic changes. 13. DEFERRING REVENUE FROM DISPUTED SALES: Many companies engaged in technology business have a major level of disputed sales. Such companies may take advantage of method change. Till the time dispute is resolved, it allows the company to defer recognition of its revenue. For instance when such a company engaged in preparation of resource planning software package which includes designing installing and interfacing for a complex enterprise. It may exceeds its production budgets or delay its installation. Such problems, creates dispute in sales price. Such type of companies who wish to recognize its revenue in such situations need advance consent from IRS. 14. CORRECTING ERRORS IN FIXED ASSETS: Many companies face a chronic issue of errors in fixed assets. The correct tax life selected for an assets for many various types of assets are mistakenly posted into fixed assets entry. In consequence of such errors, assets may be amortized and depreciated for extra period of time then required by law. Such expenses when write off for a longer period of time actually needed. Results in deduction of larger depreciation expense then actually have to be incurred. This ultimately decreases the current income. Such companies need to change the accounting procedure for the assets. This can be done generally under automatic consent techniques. And finally the management catches up all the depreciation expense in existing year. 15. DEDUCTING RESEARCH & DEVELOPMENT COSTS: Many companies capitalize their research & development costs, when they have previously been in net operating position. And they amortize such costs over a period of 60 months. Many companies now searching for new channels to accelerate deductions to minimize their current income taxes. Such companies are adopting new accounting treatments to deduct future and current research & development costs incurred in the given year. This technique change automatically however there are certain circumstances when advance consent is required. CONCLUSION: It is very true that the successful strategies for improving efficiency and cost reduction are not developed overnight or implemented in a short span of time. Rather it is a continuous process. We always have to consider the cost of time and resources available to us. We can develop appropriate strategies not only to reduce our costs but also to improve our efficiency in provision of financial services on a sustainable basis. The management should look at every possible aspect of the business to find out its direction. If management save little money from one activity then an appropriate funds can be allocated. Marketing is a continuous expense for any business. Management can market company’s products and services while taking advantage of free sources available on internet along with customary methods. Management has to keep an eye that marketing is the main source to develop your business. So there is no need to reduce expenses on advertisement and marketing.. If a company markets its product or service fruitfully then company can receive good amount of yield and ultimately the company will grow. At time when company’s share holder’s return reach to the highest possible potential, the company can gain much. If the above given strategies are followed properly then the company no doubly reach the target. If the company gets the idea how to increase its share holder value it will reach to the new heights of growths and expansion. V. REFERENCES: Brittain. A Carol & Stern, R.W. (March 01, 2008). Business Expenses to Deduct Now. Website Entrepreneur. Retrieved April 20th, 2009 from http://www.entrepreneur.com/management/legalissues/legalcenter/article191798.html. Buckley, A. (2000). Multinational finance. Edition: 4, illustrated. Published by Financial Times /Prentice Hall, 2000. Original from the University of California. Buckley, A. (2000). Multinational finance. Edition: 5, illustrated. Published by Financial Times /Prentice Hall, 2000. Original from the University of California. Hallwood, P & MacDonald, R. (2000). International money and finance. Edition: 3, illustrated. Published by Wiley-Blackwell. Journal of international money and finance (vol. 17). (2004). ScienceDirect (Online service). Published by Elsevier Science, 2004. Withers, H. (2000). International Finance. Published by READ BOOKS. Read More