3. 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.
4. 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
5. 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.
6. 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%
7. 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.
9. Survey area Cash Security Accounts Inventory
Management Portfolio Receivable
Models Cash budget - - EOQ
Techniques -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)
10. Survey Cash Management Security Portfolio Accounts Inventory
area Receivable
High Mining,crude oil,Ship Food Metal Aerospace,offi
usage building,trans.equipment beverage,aerospace manufacturing,offi ce equipment
s,Aerospace,Off.equip. ce equipment
Low Publishing,Food Industrial Metal Publishing,rub
usage beverage,Industrial farm,textiles,paper production,fabricat ber,pharmaceu
equipment ion,shipbuilding ticals
No usage Publishing,metal Shipbuilding,trans
fabric.,electric,moto portation
r,pharmacy,off.eq
Average 70 20 59 59
usage %
CV 28 96 29 49
Significa .16 .20 .83 .46
nce
11. Component Cash Management Security Accounts Invent Conclusion
s Portfolio Receivable ory
viz.1991 More than 2/3rd of the Usage is Average Averag 1. Most big US
composite companies found to very low usage e usage companies were using
use this model cash management tech.
the most & Sec. portfolio
viz.CV There is consistency in Inconsistent consistenc Averag the least while other
among the companies usage y e models were used in
for usage average
viz.chi- There is not much Not much Significanc Averag 2.Trend of using
square significance in significance e e Accounts Receivable
industry data tools highly increased at
difference 10yrs period
Trend of Increase not NA Significant Not
usage(1980 significant (i.e.14%) increase signific
vs 1990) (500%) ant
(3%)
13. 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.
14. 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.
22. 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.