Purpose The financial markets contributed to some pressures with highly volatile interest rates during the beginning of the last decade. The main objective of this study is to investigate how large U.S. Corporations have responded to the challenges in terms of financial analysis tools regarding working capital, capital budgeting and sales forcasting techniques.
Literature Review The study has mainly focussed on capital budgeting process,use of multiple measures of projects,relationship between methods of controlling capital investment,measures of divisional performance and level of organisational autonomy. The survey investigated wide variety of issues ranging from traditional method used in capital budgeting management areas to analytical techniques employed in the areas of dividend policy,mergers ,acquisitions and cost of capital. It is an extension of literature on current practices of financial management among large US corporation
Survey Procedures CFO of corporate listed in Fortune Magazine Directory used 1990 as entry point Proved to be representative of a board cross section Questionnaire was completed by vice president of finance -27.4% , Assistant Treasurer - 16.3% and treasurer – 15.6% Respondents classified the usage of variety of financial technics into three catogories. A) Frequent – Technique is regularly employed as a standard operating procedure B) Seldom – Technique is not regularly used but may be employed at the discretion C) Never - technique is not used. Same questionnaire was conducted in 1980 and 1985 Cricitism about the corporate surveys raised by Aggrawal , Rappaport and Others.
General Financial Management Technique The Coefficient of Variation (CV) of all above techniques is 9%, 43.5%, 26.2%, 13.2% respectively Cash budget is a schedule showing cash flow (receipts, disbursements and cash balance) Important for the all the firms. It shows future cash flow and do forecasted financial statement . almost all (94%) firms use it, therefore its CV is only 9%. Only 38% of the firm uses breakeven analysis because of its limitations. Higher fixed cost does not mean it is bad all the time. Higher fixed cost cause lower variable cost. But break-even analysis do not explain this changes properly so CV is high i.e. 43.5%
Leverage affect the level and variability of the firms after- tax earning and hence firm`s overall risk and return. So, financial and operating leverage are used moderately (40 to 100 percentages and CV 26%). Cash flow method are used by almost 90% of firms i. e, CV is variation of use of cash flow is only 13.6 % Cash flow statement shows the cash coming from the operation, cash used in the investing activities and financing activities It gives vital information not only about the company’s performance but also about its major activities during the year. A cash flow statement is helpful for planning and managing future financial commitments.
Survey area Cash Security Accounts Inventory Management Portfolio ReceivableModels Cash budget - - EOQTechniques -Managing -investment in -control of Inventory collections securities with receivables control through -Control of portfolios- through cr policy ABC analysis, disbursements CAPM, elements (cr std,cr Min.- -synchronization arbitrage pricing terms,cr max.analysis,Re of cash flows theory, modern period,cash d line,JIT etc portfolio theory discount,discount period)
Component Cash Management Security Accounts Invent Conclusions Portfolio Receivable oryviz.1991 More than 2/3rd of the Usage is Average Averag 1. Most big UScomposite companies found to very low usage e usage companies were using use this model cash management tech. the most & Sec. portfolioviz.CV There is consistency in Inconsistent consistenc Averag the least while other among the companies usage y e models were used in for usage averageviz.chi- There is not much Not much Significanc Averag 2.Trend of usingsquare significance in significance e e Accounts Receivable industry data tools highly increased at difference 10yrs periodTrend of Increase not NA Significant Notusage(1980 significant (i.e.14%) increase significvs 1990) (500%) ant (3%)
Analysis of Capital Budgeting Technique The table below depict the usage of capital budget techniques like ARR, PBP, NPV, IRR and NPV or IRR. The CV of above techniques is 50%, 29.7%, 24.7%, 28%, 20.3% respectively. Lower CV indicates the greater use of the techniques and vice versa. Use of Average ROR decreased from 59% to 46% because it does not consider time value of money and uses profit rather than cash flow. The uses of Payback as capital budgeting technique is also decreasing from nearly 76% to 63%. It also do not consider time value of money and profitability. It ignore cash flow after payback period.
The discounting techniques like NPV, IRR and NPV or IRR became popular. Net Present Value (NPV) and Internal Rate of Return (IRR) have become more widespread and have significantly increased during the decade. 85% of firms use NPV while 82% calculate IRR & 91% of the firms use either of two. NPV method takes all cash flow into account. NPV is only capital budgeting technique that is always consistent with shareholders wealth maximization.
Conclusion Popular financial techniques: Cash budget, sources and uses of funds, NPV, IRR, project expected return and sale forecasting models. NPV and IRR is emerging as most popular financial tool. Increase of Future market analysis to control borrowing cost as well as raw material prices. Avg. ROR and payback period are declining Aerospace industry – consistent user of financial analysis techniques . Shipbuilding, railroad, and transportation equipment industry- least user of financial analysis techniques.