Balanced Scorecard Dissertation

Balanced Scorecard in Higher Education Institutes

The purpose of this paper is to show how the Balanced Scorecard approach, a performance management system, could be implemented at institutes of higher education. Balanced Scorecard is a strategic weapon for all organizations including Educational institutes and especially institutes of higher education. The implementation of the BSC approach is presented. This paper tries to study use of BSC in various universities across the globe, the various approaches and perspectives used with examples; its use in Indian environment is also studied. The paper points out that the BSC approach is well suited to a higher education situation esp. for aligning various perspectives with strategy of the organization. Recommendations are given for the use of BSCs effectively for improving institutional performance.

Educational institutions are now experiencing the need to adopt the concepts that they have taught. Increased competition, globalization, technology and resource constraints are making institutions rethink their processes in order to ensure value adding processes are in place to ensure success. Also recently a lot of strong criticism of business education’s relevance to business and the community in general has been made (Bennis and O’Toole, 2005; Holstein, 2005). The institutes are also unable to measure how much, value is added by their programs and this only aggravates the problem (Pfeffer and Fong, 2002). With the rising competition in the environment, there has been quite a critical discussion about the nature, value and relevance of business schools. Howard Thomas (2007) in their research on business schools has pointed out the following critics:

doing irrelevant research;
being too market-driven and pandering to the ratings;
failing to ask important questions;
pursuing curricular fads;
“dumbing down” course content; and
focusing more on specialist, analytical rather than professional managerial skills

This increased criticism and competition, has made it is important for business schools, to have a clear strategy, strategic positioning and alignment to the competitive environment. They need not only to answer the strategic question concerning what kind of business school they want to be (e.g. on a continuum from internationally prestigious and research-oriented to professionally focused and applied), but also set suitable performance goals and policies to attain these goals and incessantly monitor and adapt strategy and strategic positioning when weak performance signals are observed.

It is thus more important than ever to develop and measure processes that lead to successful outcomes. This brings into focus the measures of performance as well as the process that need to be put in place to ensure that the areas of concern are addressed. The thing that makes the concept of performance management more special is that various initiatives are systematically linked together in a conscious and planned way to align as much organizational activity as possible with the intended strategy.

The Balanced Scorecard Concept

The ‘Balanced Scorecard’ (BSC) concept was formulated by Robert Kaplan and David Norton and was most notably described in a Harvard Business Review article (Kaplan & Norton 1992). The widespread adoption and use of the BSC in business is well documented. The basic premise of the BSC is that financial results alone cannot capture value-creating activities. Kaplan and Norton (1992) suggested that organizations, while using financial measures, should develop a comprehensive set of additional measures to use as leading indicators, or predictors, of financial performance. They suggested that measures should be developed that address the following four organizational perspectives:

Financial perspective: “How should we appear to our stakeholders?” – uses traditional financial measures to measure past performance.
Customer perspective: “How should we appear to our customers?” – focuses on stakeholder satisfaction and the value propositions for each stakeholder.
Internal business processes perspective: “What processes must we excel at?” – refers to internal organizational processes.
Learning and growth perspective: “How can we sustain our ability to change and improve?” – looks at intangible assets such as employee knowledge and organizational cultural attitudes for both individual and organizational self-improvement.

All of the measures in the four perspectives must be aligned with the organization’s vision and strategic objectives, enabling managers to monitor and adjust strategy implementation leading to breakthrough performance (Kaplan & Norton, 1996). The BSC provides a way of organizing and presenting large amounts of complex, interrelated data to provide an overview of the organization and foster effective and efficient decision making and continuous improvement. Developing the BSC requires the identification of several key components of operations and financial performance, establishing goals for these components, and then selecting measures to track progress toward these goals.

Literature Review

Although the concept of the BSC has been widely adopted and used in the business sector, the education sector apparently has not embraced the BSC concept widely, as indicated by the dearth of published research on this topic. A thorough review of the literature yielded few significant publications. The dearth of literature available for the topic points to the fact that BSC has not found great acceptance in the education industry. Bailey et al. (1999) surveyed business school deans’ opinions about the potential useful measurements for a balanced scorecard. Cullen, Joyce, Hassall, and Broadbent (2003) proposed that a balanced scorecard be used in educational institutions for reinforcement of the importance of managing rather than just monitoring performance. Sutherland (2000) talks about how the Rossier School of Education at the University of Southern California adopted the BSC to assess it academic program and its planning process. Chang and Chow (1999) reported that 69 accounting department heads were generally supportive of the balanced scorecard’s applicability and benefits to accounting programs. Papenhausen and Einstein (2006) revealed how BSC could be implemented at a college of business. Armitage and Scholey (2004) successfully applied the BSC to a specific master’s degree program in business, entrepreneurship and technology.

In higher education, there are certain conventions in this regard that are acceptable as a measure of excellence. Higher education has emphasized academic measures, rather than emphasizing financial performance. These measures are usually built on and around such aspects as faculty/student numbers (ratios), demographics; student pass percentages and dispersion of scores; class rank, percentile scores; graduation rates; percentage graduates employed on graduation; faculty teaching load; faculty research/publications; statistics on physical resource (see library, computer laboratories etc.). Ruben (1999) indicates that one area deserving greater attention in this process of measurement is – the student, faculty and staff expectations and satisfaction levels.

In a study conducted by Ewell, (1994) (cited in Ruben, 1999), the measures used in 10 states in the USA to report performance of higher education institutions, were as under:

Enrollment/graduation rates by gender, ethnicity and program.
Degree completion and time to degree.
Persistence and retention rates by gender, ethnicity and program.
Remediation activities and indicators of their effectiveness.
Transfer rates to and from two and four year institutions.
Pass rates on professional exams.
Job placement data on graduates and graduates’ satisfaction with their jobs.

Some of the problems associated with the use of the BSC in education arise from the different perspectives and needs that have to be addresses. Norreklit (2000) pointed out, that the perspectives in this case are interdependent and part of a linear cause and effect chain. McAdam and O’Neil have said that it is difficult to balance the different perspectives and this has to be carefully considered when designing the BSC.

Tertiary Education in India

In India, the University system, as we see today, originated about a century and half ago with the establishment of universities at Calcutta, Madras, Bombay, Allahabad and Lahore between 1857 and 1902. These were modeled after the British Universities of that period. The Central Advisory Board of Education’s (CABE) Committee on Autonomy of Higher Education Institutions (2005) in its report states that currently the Indian higher education system consists of 343 university level institutions and about 16,885 colleges and that there are many nagging concerns about its role and performance. Many of our reputed universities and colleges have lost their pre-eminent positions. Only a few manage to maintain their status and dignity in an environment of complex socio-economic pressures and worldwide changes in approaches to the educational processes. Under the rapidly expanding situation with multiplicity of expectations from the higher education system, it has become necessary to identify those attributes, which distinguish a first-rate institution from a mediocre one.

The complex array of associated issues deserves a total rethinking of our approach to higher education. Serious efforts are now underway to develop the policy perspectives in education involving deeper national introspection and fundamental changes in the structure, content and delivery mechanisms of our university system. The report further indicates that the enrollment in the Indian higher education system has increased from 7.42 million in 1999-2000 to about 9.7 million at present, indicating nearly 10 percent annual growth. The colleges account for about 80 percent of the enrollment with the rest in the university departments. Thus the programmes available in the college system largely determine the quality of our higher education. In the past decade there has been a sharp increase in the number of private colleges as well as universities with the status of either deemed to be universities or state universities. The proportion of eligible age group wishing to enter higher educational institutions will most likely increase significantly from the present level of about 7 per cent. The regulatory mechanisms will perhaps be liberalized. Higher education is continuing to expand, mostly in an unplanned manner, without even minimum levels of checks and balances. Many universities are burdened with unmanageable number of affiliated colleges. Some have more than 300 colleges affiliated to them. New universities are being carved out of existing ones to reduce the number of affiliated colleges. Under these circumstances, our dependence on autonomy as the means to improve quality of such a huge size of higher education system poses serious challenges.

Venkatesha (2003 as cited in Venkatesh & Dutta, 2007) compares and finds a lot of differences in the work-culture between the teachers of postgraduate departments of universities with those of colleges. In degree colleges, teaching is the only mandate and pertaining to this, teachers have to improve their knowledge in teaching by undergoing orientation and refresher courses, summer-camps, workshops and participating in seminars/symposia from time to time. On the basis of these activities, teachers are considered for promotion to the next cadre. Some college teachers, who are interested in research may conduct research and publish papers. Research activity of college teachers is invariably out of their natural interest rather than a yardstick for their promotion unlike in universities. Once a university teacher acquires a PhD degree, many university teachers lapse into routine teaching assignments. Because of this type of dual role of teaching and research without defined guidelines, university teachers can neglect either teaching or research, or sometimes both. In Indian universities, teachers are promoted based on their research publications, books written, papers presented in seminars/symposia, membership of various academic societies, etc., but much importance has not been given to the teachers’ contributions towards teaching.

This type of situation in our universities tempts many teachers to neglect teaching and take up some sort of research mostly uneconomical, unproductive, outdated and repetitive type and venture into the business of publishing substandard research articles. The system normally recognizes quantity like number of PhD students guided, number of papers published, etc. rather than quality of the research and publications. Unfortunately, no concrete method has been developed so far to judge the teaching and research aptitude of university teachers. Some academicians argue that both teaching and research cannot be done at the same point of time. However, it is generally thought that education (even from undergraduate level) and research should coexist to complement each other. Special emphasis on assessment-oriented teaching and research will impart a new dimension to the role of the teacher.

Commenting upon the inherent contradictions in higher education and research in sciences, Chidambaram (1999) indicates towards a peculiar situation existing in the country. Wherein on one hand a large number of people are being given post-graduate degrees in science disciplines, without an appreciation of their possible future careers; on the other hand, there is a considerable reduction in the number of such talented and motivated students seeking admissions to science courses. The dilution of resources that this irrelevant training represents has the consequence of deteriorating the quality of the training for the really talented people.

Staying on with science education, Narlikar (1999) identifies – poor methodology of science teaching that encourages rote learning, ill-equipped teachers and labs, lack of inspirational and committed teachers, poorly written text-books, peer pressure to join lucrative courses; as some of the causes of the current sickness that has afflicted the science scenario. The romance of science and a proper and correct image is just not getting projected by our institutions or the universities. In his opinion this unfortunate trend can be reversed if the society displays a will and creates an environment to cure the causes of the deeply entrenched malady.

Altbach (2005) provides an overview of the ailments afflicting the higher education machinery in India when he says that India’s colleges and universities, with just a few exceptions, have become “large, under-funded, ungovernable institutions”. Many of them are infested with politics that has intruded into campus life, influencing academic appointments and decisions across levels. Under-investment in libraries, information technology, laboratories, and classrooms makes it very difficult to provide top-quality instruction or engage in cutting-edge research. Rising number of part-time and ad hoc teachers and the limitation on new full-time appointments in many places have affected morale in the academic profession. The lack of accountability means that teaching and research performance is seldom measured with the system providing few incentives to perform. He goes on to say that India has survived with an increasingly mediocre higher education system for decades.

Now as India strives to compete in a globalize economy in areas that require highly trained professionals, the quality of higher education becomes increasingly important. So far, India’s large educated population base and its reservoir of at least moderately well-trained university graduates have permitted the country to move ahead. He concludes that the panacea to the ailments of Indian universities is an academic culture based on merit-based norms and competition for advancement and research funds along with a judicious mix of autonomy to do creative research and accountability to ensure productivity. He rightly says that “world class universities require world class professors and students – and a culture to sustain and stimulate them”. He recommends a combination of specific conditions and resources to create outstanding universities in India including sustained financial support, with an appropriate mix of accountability and autonomy; the development of a clearly differentiated academic system – including private institutions – in which academic institutions have different missions, resources, and purposes, managerial reforms and the introduction of effective administration; and , truly merit-based hiring and promotion policies for the academic profession, and similarly rigorous and honest recruitment, selection, and instruction of students.

Misra (2002) identifies “management without objectives” as one of the key reasons of the downfall of the Indian university system. He highlights the need for – adopting a functional approach in our universities; periodic academic audits; greater autonomy and accountability in all spheres of operations; open door policy welcoming ideas and people from all over; administrative restructuring decentralizing university departments and schools; and making education relevant to our people and times; as the basic steps in improving the Indian universities. The above discussion establishes the need for accountability based autonomy and being consistently relevant to the context in which the Indian universities (or any other university anywhere for that matter) may exist. This creates the backdrop for adopting the basic tenets of strategic management in the paradigms of operating our universities. The balanced scorecard is one such basic tool that can certainly be of assistance in this rationalization process.

Application of Balanced Scorecard at Institutes of Higher Education

There are a number of universities around the world that have implemented the Balanced Scorecard. They have modified the perspectives to suit their needs.

Balanced Scorecard at the University of Minnesota

Their mission statement is to prepare students to become managers and leaders who will add value to their organizations and communities by:

offering high quality graduate and undergraduate programs;
conducting valuable basic, applied and pedagogical research; and
Supporting regional economic health and development.

Based on this mission, The BSC strategy map was developed with three overarching and complementary strategic themes:

Teaching themes – selection and retention of faculty who are focused on teaching excellence to gain an increased market share of the educational market.
Research themes – identification of college faculty as dedicated research colleagues desiring to be champions in their chosen field.
Outreach themes – use of college faculty to support regional education and other intellectual support.

The BSC strategy map for the college uses a generic architecture to describe each strategy. In this way, each measure is rooted in a chain of cause-and-effect logic that connects the desired outcomes from the strategy with the drivers that will lead to the strategic outcomes.

Linkages between Balanced Scorecard Perspectives

The strategy map illustrates how intangible assets are transformed into tangible customer and financial outcomes. Even though the number of measures in each perspective varies, it is important that each measure align with the organization’s strategy. The measurements used are adapted from Bailey et al. (1999) but were tailored to apply to the college of business.

Financial perspective: The financial perspective contains the tangible outcomes in traditional financial terms.

Stakeholder perspective: Value propositions are created to meet the needs of each stakeholder. These value propositions are those that hold the greatest value to each stakeholder and represent outcomes of the college’s internal processes. Satisfactory realization of the value propositions translate into financial outcomes outlined in the financial perspective.

Internal process: The internal process perspective describes the critical internal processes that drive the stakeholder satisfaction and the college’s financial outcomes. Internal business processes deliver the value proposition to stakeholders and drive the financial effectiveness.

Learning and growth perspective: The learning and growth perspective identifies the sets of skills and processes that drive the college to continuously improve its critical internal processes. The learning and growth areas that feed into internal processes subsequently drive stakeholder satisfaction and ultimately financial outcomes.

University of California, San Diego

Chang and Chow (1999) indicated that in 1993 the University of California, San Diego’s senior management launched a Balanced Scorecard planning and performance monitoring system for 30 institutional functions using three primary data sources: 1) UCSD’s internal financial reports; 2)National Association of College and University Business Officers benchmarks; and 3) faculty, staff and student customer-satisfaction surveys.

This exercise was conducted under the framework of the university’s vision, mission, and values. Reported benefits and outcomes to date have included reorganization of the workload in the vice chancellor’s area, revision of job descriptions with performance standards, introduction of continual training for user departments, ongoing customer assessments and increased responsiveness to communication needs through the use of technology. O’Neil and Bensimon (1999) described how a faculty committee at the Rossier School of Education of USC adapted a Balanced Scorecard model originally developed for business firms to satisfy the central administration’s need to know how they measure up to other schools of education. The format of the Balanced Scorecard adapted by the faculty included the following four perspectives:

Academic management perspective (How do we look to our university leadership?);
The internal business perspective (What we excel at?);
The innovation and learning perspective (Can we continue to improve and create value?);
The stakeholder perspective (how do students and employers see us?).

O’Neil and Bensimon (1999) indicated the following favorable results from the academic scorecard implementation:

Easier approach for the university to accomplish its strategic goals.
A systematic and consistent way for the provost’s office to evaluate performance reports from various schools and departments.
The scorecard established common measures across academic units that have shared characteristics.
The simplicity of the scorecard makes it easier for academic units to show how budget allocations are linked to the metrics of excellence.

University of Wisconsin

The University of Wisconsin—Stout provides a distinct array of programs leading to professional careers focused on the needs of society. Some unique characteristics include the following:

More than half of the 27 undergraduate programs are not offered at any other campus in the University of Wisconsin system, and several are unique in the nation;
The programs emphasize business-relation processes and staying current with fast-changing technology and market dynamics; and
Traditional instruction is reinforced by extensive technology laboratories and industry partnerships.

The university’s programs also include the following key student requirements and corresponding measures or indicators:

Cutting-edge, career-oriented programs (number of new programs, placement success);
High-quality, active-learning education (percentage of lab instruction and faculty contact);
Effective student support services (retention, academic success, student satisfaction); and
Related employment and academic or career growth opportunities (placement in major, graduate success, employer satisfaction; (Karathanos and Karathanos, 2005).

Kenneth W. Monfort College of Business

The Kenneth W. Monfort College of Business (2004) at Northern Colorado’s mission is to deliver excellent undergraduate business programs that prepare students for successful careers and responsible leadership in business. Some of its unique characteristics follow:

Pursuing excellence in undergraduate-only business education, uniquely among its regional and national peers;
One of five undergraduate only programs nationally to hold Association to Advance Collegiate Schools of Business accreditations in business and accounting; and
Commitment to a program strategy of high-touch, wide-tech, and professional depth to make the college of business a value leader compared with its competition.

In addition, the programs have the following key strategic objectives and corresponding measures or indicators:

Build a high-quality student population (average ACT score of new freshmen and average transfer student GPA);
Maintain high-quality faculty (overall percentage of faculty academically and or professionally qualified);
Maintain adequate financial resources (available state funds and available private funds); and
Develop market reputation consistent with program excellence (college of business media coverage; Kenneth W. Monfort College of Business, 2004).

Applicability and Design of BSC in the Indian Environment

Review of extant literature indicates that business organizations, as well as academic institutions, are fundamentally rethinking their strategies and operations because of changing environment demanding more accountability. The BSC is described as a novel approach to face these challenges (Dorweiler and Yakhou, 2005). The strategies for creating value in education need to be based on managing knowledge that creates and deploys an organization’s intangible assets. The scorecard defines the theory of the business on which the strategy is based hence the performance monitoring can take the form of hypothesis testing and double-loop learning. A good BSC should have a mix of outcome measures and performance drivers (Kaplan and Norton, 1996). Marketing and communication strategies vis-a` -vis institutions of higher education assume greater import as the image portrayed by these institutions plays a critical role in shaping the attitudes and perceptions of the institution’s publics towards that institution (Yavas and Shemwell, 1996). In India, for instance, institutions of higher education are becoming increasingly aggressive in their marketing activities. In this increasingly competitive environment, the marketers of higher education should be concerned about their institution’s positioning and image.

The marketing of educational programmes has attracted attention of researchers who have identified research-based planning and programme development, relationship marketing and non-traditional methods for education delivery as key areas for future focus (Hayes, 1996).

Some of the reasons for marketing of higher education gaining importance in the management of higher education programs and institutions are – the founding missions being found increasingly ill-suited for the demands of the marketplace; budgets becoming excruciatingly tight while departments and programmes clamoring for more support; the recruiting and fund-raising arenas having become extremely competitive as well as hostile; higher education being more and more dominated by many largely undifferentiated colleges and universities offering similar programmes; demographic shifts in the operating environment marked by diminishing numbers of traditional full-time students, fewer full-pay students and fewer residential students; escalating demand for adult higher-education and continuing and special-focus programmes; and last but not the least, the sharp rise in the cost of higher education (Kanis, 2000). In India too recently as liberalization has progressed, although in fits and starts, governmental support to institutions of higher learning in the form of grants and subsidies, is drying up. The movement of self-sustenance is gaining force. This also adds up and forces managers of educational institutions, especially in the public domain, to re-think their mission and strategies (Venkatesh, 2001).

Ruben(2004) says that students are affected not only by the teaching environment but also by the learning environment, which includes facilities, accommodation, physical environment, policies and procedures, and more importantly, interpersonal relations and communication and from every encounter and experience. Hence the faculty, staff and administrators have to set good examples by their deeds and recognize that everyone in an institution is a teacher. A wide range of stakeholders and their diverse claims/interests and objectives have to be addressed in the context of the institution of higher education in India. The customer perspective is supposed to aim at the immediate needs and desires of the students, parents, faculty and staff, alumni, the corporate sector and the society at large. It is relevant here to state that looking at students solely as customers becomes a sort of a misnomer as they are also (if not only) the “throughput” that eventually gets processed in the institution and ends up accepted (or rejected) at the verge of graduation. Hence the corporation and society at large should be considered as the real customers.

The second component involves the internal business or operations perspective. This inherently focuses on the implementation and delivery of the academic, research and other programs by the institution and the degree of excellence achieved in the same. The innovation and learning perspective of the organization looks at the development of faculty and staff as a precursor and foundation to excellence in program design and delivery. Finally, the fourth component constitutes of the financial performance and its measure. It is clear in the Indian context especially, that the government although eschews the “profit” word for educational institutions, however is emphasizing more and more on self-sustaining programs and institutions as a desirable outcome of the strategies and models envisaged and pursued by universities and colleges. Surpluses are important as only then institutions can look for achieving greater autonomy in designing and delivering ever new courses and programs that are relevant to the population in context, but expensive to implement.

Kaplan and Norton (1996) say that companies are using scorecard to:

Clarify and update vision and strategic direction;
Communicate strategic objectives and measures throughout the organization;
Align department and individual goals with the organization’s vision and strategy;
Link strategic objectives to long term targets and annual budgets;
Identify and align strategic initiatives;
Conduct periodic performance reviews to learn about and improve strategy; and
Obtain feedback to learn about and improve strategy.

All the above benefits are relevant in the context of the institutions of higher learning in India. As Pandey (2005), indicates – “a good aspect of BSC is that it is a simple, systematic, easy-to-understand approach for performance measurement, review and evaluation. It is also a convenient mechanism to communicate strategy and strategic objectives to all levels of management”. According to Kaplan and Norton (2001) the most important potential benefit is that BSC aligns with strategy leading to better communication and motivation which causes better performance. Considering the linkages in service management profit chain (Heskett et al., 1994 cited in Kaplan and Norton, 2001) we can say that the potential benefits can be:

Investments in faculty and staff training lead to improvements in service quality;
Better service quality leads to higher customer (stakeholder) satisfaction;
Higher customer satisfaction leads to increased customer loyalty; and
Increased customer loyalty generates positive word of mouth, increased grants/revenues and surpluses that can be inserted into the system for further growth and development.

With growing popularity for Indian Engineers and graduates in job employment abroad, India has to build world-class quality into higher education. In fact, a critical test of a scorecard’s success is its transparency: from the 15-20 scorecard measures, an observer is able to see through the organizations corporate strategy (Kaplan and Norton, 1993).

Conclusion

In this paper we propose that in an environment that demands increasing accountability from business schools, the BSC Approach offers a promising and valuable tool for implementing a strategic performance management system in institutes of higher education. The top management should focus on strategic themes instead of merely relying on formal structures in institutes. The strategy of the institute/university should be communicated to everyone in a easy to understand language. The roles of teachers, administration staff, deans and others should be clarified in advance so as to implement Balanced Scorecard. We propose that BSC will improve communication in institutes as well as work as feedback mechanism for all concerned. This will result in flawless communication and relatively easy implementation of institutional strategy. We also propose to use BSC for balancing internal as well as external perspectives, as so to foster institutional performance.

So, if Higher education institutions apply the BSC to their organization they will be able to position their students and programs positively in the minds of the international audience.

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Project Management Constraints

Efficient project management has become one of the most popular tools for both private and public organizations as project handlers have sought ways to improve their operations. Project managers seek to achieve success across all sectors when handling a project. Technological advancement, new product development and streamlining of business perspectives are examples of targets set by project managers. During the inception of a project, there is the careful planning, organizing and prioritizing available resources achieving the desired outcome or the projected results in the least. At the inception stage, a project seeks to achieve the set target within minimal time while using the least amount of resources. However, every project manager faces challenges during the implementation of a project. Such challenges arise from the presence of different constraints within project management.

Background of the study

Even though a project manager prefers to achieve success all through, there are instances where resources allocated become minimal. Timeframe awarded to a project may also exceed leading to the scope of a project taking a new approach. Project constraints hinder project success hence the need to address each constraint. Despite the fact that project constraints are not consistent, schedule, resources and quality seem to be popularly present hindering success. The omnipresence of these three constraints has led to the name triple constraints, and this research study will address these constraints discussing how they affect project success (Kendrick, 2009).

Making a project successful within the triple constraint proves to be a challenge for every project manager. Regardless of whether its quality, resources or time, the three elements have the notion of working in tandem manner. Significantly, the absence or scarcity of one of these elements adversely affects the triumphant completion of projects. An efficient project manager comprehends that the main key of achieving success for a project entails the balancing of the triple constraints (Dobson, 2004).

Research methodology

The research methodology involved entails a presenting approach adopted within the study. Careful analysis of the triple constraints will be presented. The analysis will involve illustrations of various ways in which such project constraints affect the successful completion of a project. The approach taken will require meeting the expectations of the constraints of project management. The approach taken requires meeting the expectations of constraints in project management. Such entails the researcher to espouse a comprehensive research methodology enabling the understanding of project constraints adverse effects.

Approach

In order to remain consistent with this research, there is the approach of extensive methodologies adopted to assist readers in achieving the required results. There were appropriate considerations of projects that have failed or succeeded. Essential to this study, it is significant for a project manager to identify basic project management aspects in order to determine the purpose of a project. Such allows the understanding of project constraints leading to identifying ways of overcoming the constraints (Russell, 2011).

Project Constraint – Quality and Scope

Functions, features, content and data all constitute the scope of work to be done for any project. In order to achieve quality for any piece of work to be done, a project manager is required to provide a precise and specific statement identifying the desired final result of the project undertaken (Dobson, 2004). Every project should have a well-defined and articulate scope of work. However, it is essential to note that the scope of a project is dependent on the output quality. The output quality is essential since it ensures that a project scope is achievable.

Notable to this research, project scope requires effective planning, use of available resources, and proficient management techniques achieving the set target. Failure to adhere to such aspects will frequently lead to project failure. Mandatory for any project manager, changing the scope halfway through the project is suicidal, and often leads to project failure. Nonetheless, every project requires minor changes that are permissible during implementation in order to ensure success (Kendrick, 2009).

The quality of work done is dependent on a project manager’s understanding of project outcomes. Prior to proceeding on with a project, the client will usually have issued instructions on the expected outcome of an assignment. Nonetheless, several prospects of divergence will ensue regarding the necessity to stabilize around the existent resources. A competent project manager has the ability, and resources to cultivate success among projects undertaken. Organizations need to realize the significance of succeeding in projects as these increases their clientele base.

The project manager should have subdivisions that enable tasks undertaken within an organization (Goodpasture, 2004). There are assorted personnel dealing with the diversified projects. For instance, the manager is responsible for overseeing that the objective of the project is realized. The manager is also responsible for directing vast and significant decisions to avoid project failure. Executing this in a resourceful manner requires the program manager to ensure discipline and order is present among supervisors and other member staff.

Project Constraint – Time and Scheduling

Being the primary consideration, time management should be analyzed to the smallest detail. A competent project manager realizes the essentiality of analyzing the required time, and component to ensure successful completion of a project (Dobson, 2004). After careful analysis, each of the components is broken down in order to assign specified amount of time for handling a particular task. A project undertaken requires such aspects since they allow the estimation of a period with which the project can be undertaken. Apart from the estimation of the project period, resources required are identified to ensure success.

Despite the three constraints having a correlation to one another, time management within a project is seen as a diverse unit. Such view is alongside the realization that proper execution of any project within the allocated time is dependent on circumstances and efficient techniques. Project failure may occur despite the project manager having allocated a specific timeframe for each task. Failure can occur should there be exact resources to handle a project (Goodpasture, 2004). Abrupt emergencies may require the use of more resources in handling scrupulous tasks, leading to limited resources. The limitations of resources will often lead to an extended time-frame for a project risking failure (Russell, 2011).

Most project failures have resulted from undermining time allocated to different tasks. However, this often occurs when a project manager is unfamiliar with tasks undertaken. Failure of a project will frequently arise from unexpected events, risks and uncertainties. If the project manager is deemed to be inexperienced, the rise of potential risks will prolong the previously allocated time. Present in most projects undertaken, there ought to be an effective organization, proper restructuring and estimation techniques. Such will ensure that time is managed in an effective manner reducing the risk of failure for undertaken projects.

Project constraint – Cost and Resources

A competent project manager realizes that success of a project is compliant with the readiness and available resources. Even though time has been allocated to different tasks, it is also essential to allocate needed resources to complete the tasks at hand. However, providing the needed resources requires a project manager to have the capital needed to acquire the necessities. Such aspects require wholesome efforts on all levels of accountability. Ranging from casual workers, permanent employees, middle and top level managers, successful project completion requires collaborated efforts from parties involved. Realizing that resources like manpower are the most essential in achieving success, a resourceful project manager ought to ensure that the needs and requirements of labour present is met. Resources pose as the greatest risk in project failure (Wysocki, 2011). There are variables present like rate of materials, machinery and equipment, labour expenses which determine success or failure of a project.

Depending on market prices, the rate of materials seems to be at a constant change requiring the individual assigned to be per with the new prices. The new prices of different prices lead to subsequent changes in quality. There ought to be available capital to purchase high quality materials. For instance in building constructions, it is paramount to purchase quality materials, and failure to do so has a definite chance of project failure resulting from building collapse (Goodpasture, 2004). The purchase of machinery and equipment is also determined by price ranges within the market. However, in order to ensure success, there needs to be the use of high quality machinery and equipment.

Project running is comparative to embrowning a project plan comprehensive of the scrupulous objectives and missions. In addition, there ought to be a quantification of the assets required, the accounts should be indomitable within a timeline that is set. There is the existence of a variety of gear that is essential in making projects undertaken to be successful. The responsibilities of the manger should be as minimal as possible to avoid exhaustion from too much pressure to perform. Essential to this study, it is essential to identify different project phases and measure the success. However, the project manager should ensure that the manpower available is well taken care of since they are the success of any organization.

Conclusion

The prioritization of the constraints within a project is the foremost task needed to be undertaken by a project manager. In addition to the development of strategies in the management of multiple constraints, it is also instrumental that a project manager effectively maintains communication with the client. This ensures that they are both on the same page and that the client’s expectations are being met. Additionally, any competent project manager must ensure that they have a thorough knowledge of project management skills. This greatly assists them in being able to effectively and efficiently cater for any unforeseen project constraints. The act of balancing a project’s responsibilities is facilitated by the project manager’s ability to chart, analyze and implement it. This is because the project manager is aware of and has experience with a project’s concurrent risks.

References

Dobson, M, S. (2004). The Triple Constraints in Project Management. Arizona: Management Concepts.

Goodpasture, J, C. (2004). Quantitative methods in project management. Arizona: J. Ross Publishing.

Heldman, K. (2011). PMP Project Management Professional Exam Study Guide. USA: John Wiley & Sons

Kendrick, T. (2009). Identifying and Managing Project Risk: Essential Tools for Failure-Proofing Your Project. Phoenix: AMACOM Div American Mgmt Assn.

Russell, D. (2011). Succeeding in the Project Management Jungle: How to Manage the People Side of Projects. Phoenix: AMACOM Div American Mgmt Assn.

Wysocki, R, K. (2011). Effective Project Management: Traditional, Agile, Extreme. New York: John Wiley & Sons.

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Currency Risk Dissertation

Currency Risk

Currency risk is basically a risk that arises when a price of some country’s currency changes against the currency of some other country (Alastair, 2013). Whenever the companies or investors have their business operations or assets across their national borders, they are exposed to currency risk if they do have their positions hedged (Stephens, 2003). In these modern times of heightening currency volatility and increasing globalization, changes on the currency rates or the exchange rates causes to have a substantial influence over the profitability and operations of companies and even the government in those countries (Graham, 2014). The volatility of the exchange rates or currency rates not only affects the large corporations or multinationals, but also the medium and small sized businesses that operate only in their homeland (Horcer, 2011).

Types of currency risks or exposure

What follows is a brief account of different types of currency risks or exposure that are faced by companies and governments due to the volatility of the currency or exchange rates.

Economic risk

It is among the lesser discussed risks by researchers and scholars, but still is an evident one and has a substantial presence. Such a risk is basically caused by effects of unanticipated or unexpected fluctuations in currency on the future market value and cash flows of a company (Coyle, 2001). The impact of such a risk is long term is nature. It can have a substantial impact on the competitive position of a company even if the company is not making overseas sales or operating overseas. The source behind the economic risk is the change in competitive strengths of exports and imports (Plaza, 2011). This can be understood with an example.

For instance, if a company exports from UK to a country in the Eurozone and the price of the Euro weakens against the pound sterling i.e. it comes from 1.1 euros to 1.3 euros per pound sterling. This is a weak position because one would have to give 0.2 Euros more for one pound sterling. This means that a product from UK priced 100 pounds would cost 130 Euros instead of 110 Euros. This means that the goods from UK would become less competitive in the European market. On the other hand, the goods that are imported from Europe to UK would cost lesser than previously and would make them competitive in the UK market (MOguillansky, 2003).

Methods of risk mitigation for economic risk could be difficult, and especially the smaller companies which have limited international dealings (Hakala & Wystup, 2002). Some of the following approaches in general could be of importance.

Try exporting and importing from multiple currency zones and hope that those zones do not all move together, or move together to the same extent. For example, for the six months from January 2010 to June 2010 €/US$ rate of exchange moved from €/US$0.6867 to €/US$ 0.8164. This caused to strengthen the US dollar against the Euro by 19 percent. This resulted in making it less competitive for the USA manufacturers to make exports to a country in Eurozone. However if during the same period, the value of Pound relative to the US dollar moves from 0.6263 to 0.6783, this would have strengthened the US dollar relative the pound by 8 percent. In such a case, he trade from US to United Kingdom would not have been affected so badly(Poghosyan, 2010).
Another method here is to make the goods in the countries to which they are sold. This is something which is followed by multinationals. Though in such a case, the raw materials might need to be imported and affected by change in currency rates, but the other expenses such as electricity bills and wages in the local currency would not be subject to the currency risks(Clark & Ghosh, 2004).

Translational risk

The impact of currency rate fluctuations on the company’s fiscal statements results in translational risks. It is especially the case when the company features foreign subsidiaries (Matsukawa & Habeck, 2007). This risk is normally short to medium term. If the subsidiary of a company is in some country where the currency weakens, the value of assets of such subsidiary in the company’s consolidated accounts will weaken (Homaifar, 2004). The effect is not severe as it does not impact on the day to day cash flows. However, scholars and practitioners have reserved the translation risk usually for the consolidation effects (Stephen, 2003).

The exposure can be partially mitigated through funding of the foreign subsidiary through a foreign loan. For instance, take a USA subsidiary of a company which has been set up by the parent company using equity finance. The financial position statement of the company would appear something like this:

Current assets – 0.5 million US dollars

Non-current assets – 1.5 million US dollar

Equity – 2.0 Million US dollars

Now if the US dollars, the total assets of the company would have a lesser value as a result.

However, in case if the subsidiary for example was formed through using 50 % US borrowings and through 50 % equity, the financial position would be:

Current assets – 0.5 million US dollars

Non-current assets – 1.5 Million US dollars

The breakup of this position or the assets is that $ 1 million loan is used to finance the assets and the rest 1 million is equity borrowings. So the investment of the holding company is only $ 1 million US dollars and the net assets are only worth US dollars 1 million. Now if the US dollars weakens in such a case, only the net assets value of US dollars 1 million decreases (John Y, 2010).

Transaction risk

Transaction risks are the most evident and talked about currency risks due to fluctuations in currency (Sebetian & Solnik, 2008). The exposure exists when the companies exporting and importing. This type of risk is of a short to medium term. If the rate of exchange during the time the company enters into contract and the time of actual receipt or payment of money changes, the amount of the home currency to be received or paid will alter and would make the future cash flows uncertain (Bartram & Bodnar, 2007).

Methods of currency risk mitigation and their shortcomings

Some of the most renowned and widely used risk mitigation strategies are those are used by companies to overcome transaction risks. Though in case of foreign currency transactions, there are chances of obtaining profit due to the increase in the rate of foreign currency (Ugur, 2012).

Non-hedging techniques and currency risk

There are two obvious risk mitigation techniques for minimizing the transaction exposure.

Transferring exposure

Under this technique, the exposure or risk of the transaction is transferred to the other company. For instance, an exporter of US selling products in Germany could quote the sale price in US dollars. In such case the transaction exposure or risk for any uncertainty in exchange rate would be faced by the German importer (Ephraim & Judge, 2008).

Netting exposure

The currency risk of transaction is minimized here by netting out. This method is of vital importance for the larger companies that are frequently involved in large amounts of currency transactions (Cavusgil, et al., 2012). Receivable of Deutsche marks of 100 million owed to some US company in 45 days is safe if the USA Company is to pay out some German suppliers Deutsche marks 75 million in about 30 days. The risk increases further if the business only has receipts on continuing basis in Deutsche marks. The risk is decreased when the receipts and payments are in various different currencies. An example has been given earlier in the exposition. Though the transaction of currency cannot be netted off fully, it may become so small that the company accepts the exposure or risks rather than incurring costs associated with hedging that are given below (Judge, 2009).

Hedging techniques for currency risk mitigation (hedging techniques or instruments)

Mitigating short term foreign exchange risks

For eliminating short term transaction exposures of currency, there are various hedging instruments available with different costs.

Forwards contracts

The most direct means to eliminate the transaction risk is by hedging the risk with forward exchange contract. For instance, suppose some USA exporter sells 50 wine cases to some Venezuelan company under sales contract, which specifies an amount of 15 million bolivars to be paid in 60 days. The exporter could eliminate the transaction exposure through the 15 million bolivars to his bank at a 60days forward exchange rate of 750 bolivars / dollar. Now it does not matter what happens to the currency rate during the next month, the company will have assurance that it will be able to convert 15 million bolivars into 20,000 US dollars (Bartram, 2008).

Now the risk or limitation with this method is that exposure could only be eliminated if Venezuelan buyer pays the obligation of 15 million bolivars. The default from the buyer would not relieve the US producer from the obligation towards the bank. Another limitation is that the forward contracts are not usually accessible for the small businesses. Banks normally quote rate that are unfavorable for the smaller businesses because the risk will be borne by the bank in case the company does not fulfill the forward contract. Creditworthy companies are also refused by banks. The non-eligible companies for forward exchange rate contracts can use the option to hedge transaction exposure through future contracts (Bartram, 2008).

Future contracts

The forward market hedge and future market hedge have many similarities. For instance, a US company has payable of $50,000 to be paid by the third Wednesday of September. This organization is able to purchase a Canadian dollar future contract for September. Now if value of Canadian dollar increases, the value of the payable of US Company will increase. However, value of the future contract will also increase by the same amount which would make the net value unchanged. Vice versa would be the case if the Canadian dollar value falls (Qing, et al., 2007).

The future contracts are marked by the market. The losses are to be met in cash and the offsetting currency transactions would be delayed till the transaction takes place. It might also bear the risk for insolvency for the company (Hull, 2008).

Hedging through the money market

Where future market hedge is expensive, not available, or bears large risk of insolvency, a company can use the money market hedge. Suppose a US exporter is to receive 4 million Brazilian reals in in one month time. The exposure or risk of currency fluctuation could be eliminated here through borrowing Brazilian reals at a 10 percent interest rate per month. The business can them convert them into US dollars at spot rate. When Brazilian customer after one month pays of the 4 million reals, they are utilize the settle the principle and interest on the loan.

Companies should pay out more for borrowing the funds than they could receive when they lend the funds. The interest rates charged by banks rises with risk and the requirement of collateral securities or pledge are also in place. In the situation in which the business borrows future payable, it could pledge reals deposit as the collateral security. The company’s and borrowing rate would be almost risk free when the bank has low risk. In such a case, money market hedge will be normally the least expensive option even if forwards and future contracts are available (Maurer & Valiani, 2007).

Cross hedging

Cross hedging is another hedging method which is of importance for countries where options such as future contracts, forward rates, options or credits in the foreign currency are not available (Madura, 2012). It is a hedge that is established in currency which is related to value of currency in which the payable or receivable is denominated. In some of the cases, finding currencies that are correlated is easy because many small countries try pegging their currencies with major currencies like Euro, Dollar, or franc. However, there might not be perfect correlation among these currencies as efforts for pegging the values fail frequently (Lane & Shambaugh, 2010).

Now for instance, if there is a company that has receivables or payables denominated in the currency of some small nation that has no developed credit market or currency. In such case, it will explore possibility that the currency might be pegged to some major currency value. If not, then the company would observe the previous changes in value of that currency to determine whether such currency in correlated with the changes in value of some major currency. The company then undertakes a futures market, forward market, options or money market hedge in that major currency (Chue & Cook, 2008). A limitation with this method is that its success depends change in major currency value corresponds with the currency of the smaller country (Calamos, 2011).

For now, there is an only limited market for the currency futures options that features maturities greater than 1 year. Only a few banks render foreign exchange contracts of long term with maturities such as seven years. Only the credit worthy and the large corporations qualify for those contracts (Hull, 2008).

Back to back loans

Back to back loan arrangements are a method to reduce currency risks in long term transactions. For instance, where a company enters into a project with some company in another country, it can use parallel or back to back loan arrangements for reducing risk. Here the company will lend loan in its homeland currency to the other company if the other intends to invest in that country. Similarly the other company with whom the lending company is making investment will arrange loan in its own homeland currency for the investing company. Thus they will pay each other from the earnings they derive from their respective investments in the form of currencies of their respective countries. In such case both companies will be under bilateral arrangement which will be outside the scope of foreign exchange markets. Ultimately neither of them would be affected by fluctuations in exchange rate.

However the risk of default from either company always remains and they are not freed from their loan liabilities (Patnaik & Shah, 2010).

There are various other methods that are used for mitigating currency risks, but they vary from country to country and have their own limitations in general and in the context of specific countries.

Conclusion and recommendations

Effective legal drafting could be used to minimize substantial international transaction risk. The risk of currency fluctuation exposure could be eliminated or mitigated using the instruments or methods that have been described in this exposition. Though many of the instruments do not hedge the transaction exposure entirely, but they are more accessible for the medium and small size firms and the individuals. Though the instruments and methods increase transaction cost, but still businesses intend to minimize risks as a priority.

Individuals and companies should have an understanding of the transactions they do in terms of the risks associated with them. Similarly they should have an understanding of their financial and money market so that they can determine the risk mitigation instruments and techniques in those markets. In case the risk is higher, then the cost of mitigation techniques should never be avoided. They should have an eye on both the present and future currency risk of a transaction.

Bibliography

Alastair, G., 2013. Introduction to currency risk. New York: Rutledge.

Bartram, S. M., 2008. What lies beneath: foreign exchange rate exposure, hedging and cash flows. Journal of Banking & Finance, 32(8), pp. 1508-1521`.

Bartram, S. M. & Bodnar, G. M., 2007. The exchange rate exposure puzzle. Managerial Finance, 33(9), pp. 642-666.

Calamos, N. P., 2011. Convertible arbitrage: insights and techniques for successful hedging. London: John Wiley & Sons.

Cavusgil, S. T., Knight, G. & Reisenberger, J. R., 2012. International business. New Jersey: Pearson Education.

Chue, T. K. & Cook, D., 2008. Emerging market exchange rate exposure. Journal of Banking and Finance, 32(7), pp. 1349-1362.

Clark, E. & Ghosh, D. K., 2004. Arbitrage, hedging and speculation: the foreign exchange market. New York: Greenwood Publishing Group.

Coyle, B., 2001. Foreign exchange markets. Chicago: Taylor & Francis.

Ephraim, C. & Judge, A., 2008. The determinants of foreign currency hedging: does foreign currency debt induce a bias? European Financial Management, 14(3), pp. 445-469.

Graham, A., 2014. Hedging currency exposure. New York: Routledge.

Hakala, J. & Wystup, U., 2002. Foreign exchange risk: models, instruments and strategies. London: Risk Books.

Homaifar, G., 2004. Managing global financial and foreign exchange rate risk. New York: John Wiley & Sons.

Horcer, k. A., 2011. Essentials of financial risk management. Hoboken: John Wiley & Sons.

Hull, J. C., 2008. Fundamentals of futures and options markets and derivate. 6th ed. s.l.:Prentice Hall.

John Y, C. M. S.-D. V. L. M., 2010. Global currency hedging. The Journal of Finance, 65(1), pp. 87-121.

Judge, A. E. C., 2009. Foreign currency derivatives versus foreign currency debt and the hedging premium. European Financial Management, 15(3), pp. 606-642.

Lane, P. R. & Shambaugh, J. C., 2010. Financial exchange rates and international currency risk exposures. The American Economic Review, pp. 518-540.

Madura, J., 2012. International financial management. Singapore: Cengage Learning.

Matsukawa, T. & Habeck, O., 2007. Review of risk mitigation instruments for infrastructure financing and recent trends and developments. Washington: World bank Publications.

Maurer, R. & Valiani, S., 2007. Hedging the exchange rate risk in international portfolio diversification: currency forwards versus currency risk options. Managerial Finance, 33(9), pp. 667-692.

MOguillansky, G., 2003. Corporate currency risk management and exchange rate volatility in Latin America. Santiago: United Nations Publications.

Patnaik, l. & Shah, A., 2010. Does the currency risk shape unhedged currency exposure?. Journal of International Money and Finance , 29(5), pp. 760-769.

Plaza, D., 2011. The role of currency risk futures in risk management. Norderstedt: GRIN Verlag.

Poghosyan, T., 2010. Determinants of foreign exchange risk premium in the Gulg cooperation council countries. Washington: International Monetary Fund.

Qing, D., Dong, L. & Kouvelis, P., 2007. On the integration of production and financial hedging techniques in global markets. Operations Research, 55(3), pp. 470-489.

Rose, P. S. & Marquis, M. H. L. J., 2008. Money and capital markets. London: McGraw-Hill/Irwin .

Sebetian, M. & Solnik, B., 2008. Applying regret theory to investment choices: currency hedging decisions. Journal of International Money and Finance, 27(5), pp. 677-694.

Stephen, B., 2003. Managing currency exposure. CFA Magazine, 14(4), pp. 50-51.

Stephens, J. J., 2003. Managing currency risk: using financial derivatives. John Wiley & sons.

Ugur, L., 2012. Currency hedging and corporate governance: a cross country analysis. Journal of Corporate Finance, 18(2), pp. 221-237.

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Theories of Finance

Finance and Time Value of Money

Definition of Time Value of Money

The time value of money is the value of money figuring in a given amount of interest earned over a given amount of time. It means the value of an amount of money is different in different time periods. The value of a sum of money received today is less many than its value received after some time. Conversely, the sum of money received in future is less valuable than it is today. The time value of money is the central concept of finance.

For example, USD 100 of today’s money invested for one year and earning 5% interest will be worth of USD 105 after one year. Therefore, USD 100 paid now or USD 105 paid exactly one year from now both have the same value to the recipient.

Importance of Time value of money

Time value of money is considered as the fundamental concept in financial management. It can be used to compare investment alternatives and to solve problems involving loans, mortgage, leases, savings and annuities.

Financial planning

How much fund is needed? It’s needed for what’s time? What’s the sources and to this source how much money is needed is detailed description is called financial planning.

Source Identification

After financial planning the most important work of finance is to identify sources from where that fund will be collected. It’s may be a person or organization that will be decided using time value of money.

Raising Fund

Another most important task of finance is to collect funds from identified sources. The question of how much money will be invested in a particular project that will be decided through TVM.

Repayment of loan

The process of repayment of a loan is evaluated through the process of TVM.

Definition of Present Value

Present value is the current worth of a future sum of money or stream of cash flows given a specified rate of return i.e. present value is the current value of a future amount. The amount is to be invested today at a given interest rate over a specified period to equal the future amount.

The present value formula has four variables. The formula is –

PV=FV/ (1+i)ⁿ

Definition of Future Value

Future value is the value of an asset or cash at a specified date in the future that is equivalent in value to a specified sum today. It measures the nominal future sum of money that a given sum of money is worth at a specified time in the future assuming a certain interest rate or more generally rate of return. It is the present value multiplied by the accumulation function.

Following is the future value formula-

FV=PV (1+r) ^t

Definition of Annuity

An annuity, in finance is a terminating streams of fixed payments i.e. a collection of payment to be periodically received over a specified period of time. The valuation of such a stream of payment s entails concepts such as the time value of money, interest rate and future value. For example- annuities are regular deposits to a savings account, monthly home mortgage payments and monthly insurance payments.

Annuity can be classified by the frequency of payment date. The payments may be made weekly, monthly, quarterly, yearly etc.

Finance Amortization

Amortization is the process of decreasing or accounting for an amount over a period. In the concept of finance amortization is the process by which loan principle decreases over the life of a loan. An amortization table shows this ratio of principle and interest and demonstrates how a loan’s principle amount decreases over time. Amortization is generally known as depreciation of intangible assets of a firm.

Amortization Schedule

It is a table detailing its periodic payment on an amortizing loan as generated by an amortization calculator. This amortization schedule is based on the following assumptions;

First, it should be known that rounding errors occur and depending how the lender accumulates this error, the blended payment may vary slightly some months to keep this error are adjusted for at the end of each year or at the final loan payment. There are a few crucial points worth noting when mortgaging a home with an amortized loan.

Second, understanding the first statement, the repetitive refinancing of an amortized mortgage loan even with decreasing interest rates and decreasing principle balance, can cause the borrower to pay over 500% of the value of the original loan amount.

Third, the payment on an amortized mortgage loan remains same for the entire loan term, regardless of principle balance owed but only for a fixed rate, fully amortizing loan.

Methods of Amortization

There are different methods in which to arrive at an amortization schedules. These are;

Straight line
Declining Balance
Annuity
Bullet
Balloon
Increasing Balance (Negative Amortization)

Capital Budgeting

Capital budgeting is the process of evaluating and selecting long term investments that are consistent with the goals of the shareholder’s profit maximization.

PBP

Payback period is defined as the number of years required to recover a project cost. The regular pay back method ignores cash flow beyond payback period and it does not consider the time value of money. The payback provides an indication on a project’s risk and liquidity, because it shows how long the invested capital is at risk.

NPV

The net present value method discounts all cash flows at the project’s cost of capital and then sums those cash flows:

Acceptance rule- Accept if NPV>0
Reject if NPV<0
Project may be accepted if NPV=0

Merits

Considers all cash flow
True measure of profitability.
Based on the concept of Time value of money.
Satisfies the value audibility principle.
Consistent with the wealth maximization principle.

Demerits

Requires estimates of all cash flows.
Requires computation of the opportunity cost of the capital that possesses practical difficulties.
Sensitive to discount rates.

IRR

The discount rate that equates the present values of an investment, the cash inflows and outflows is its Internal Rate of Return.

Acceptance rule- Accept if IRR>k,
Reject if IRR<k,
Project may be accepted if IRR=0.

Merits

Considers all cash flows.
True measure of profitability.
Based on the concept of time value of money.
Generally consistent with profit maximization principle.

Demerits

Requires estimates of cash flows.
Does not satisfy the value audibility concept.
At times, fails to indicate correct choice between mutually exclusive projects.
At times, yields multiple rates.
Relatively difficult to compute.

PI

The ratio between the present value of the net cash benefit to the net cash outlay is profitability index or benefit-cost ratio;

Acceptance rule- Accept if PI>1.0,
Reject if PI<1.0,
Project may be accepted if PI=1.0

Cost of Capital

Definition of cost of capital

It is the rate that a firm must earn on its project investments to maintain its market value and attract funds.

The cost of each source or component is called specific cost of capital. When these specific costs are combined to arrive at overall cost of capital, it is referred to as the weighted cost of capital.

Assumptions

A basic assumption of traditional cost of capital analysis is that the firm’s business and financial risks are unaffected by the acceptance and financing of projects.

Business risks

It is the risk to the firm of being unable to cover fixed operating costs.

Financial risks

It is the risk to the firm of being unable to cover required financial obligations such as interest and preference dividends.

Explicit Costs

Explicit cost of capital is the “rate of return of the cash flows of the financing opportunity”.

Implicit Cost

Implicit cost of capital of funds raised and invested by the firm may, therefore, be defined as the rate of return associated with the best investment opportunity for the form and its shareholders that would be foregone.

Cost of debts

Cost of debt is the after tax cost of long-term funds through borrowing.

Cost of preference stocks

It is the annual preference stock dividend divided by the net proceeds from the sale of preference stocks. Or it can be said as the dividend expected by the preference stockholder.

Finance and Working Capital Cycle

Definition of Working Capital

Working Capital refers to that part of the firm’s capital, which is required for financing short-term or current assets such a cash marketable securities, debtors and inventories. Funds thus, invested in current assets keep revolving fast and are constantly converted into cash and this cash flow out again in exchange for other current assets. Working Capital is also known as revolving or circulating capital or short-term capital.

Why finance working capital cycle is calculated

Working capital is a common measure of a company’s liquidity, efficiency, and overall health. Because it includes cash, inventory, accounts receivable, accounts payable, the portion of debt due within one year, and other short-term accounts, a company’s working capital reflects the results of a host of company activities, including inventory management, debt management, revenue collection, and payments to suppliers.

Positive working capital generally indicates that a company is able to pay off its short-term liabilities almost immediately. Negative working capital generally indicates a company is unable to do so. This is why analysts are sensitive to decreases in working capital; they suggest a company is becoming over leveraged, is struggling to maintain or grow sales, is paying bills too quickly, or is collecting receivables too slowly. Increases in working capital, on the other hand, suggest the opposite. There are several ways to evaluate a company’s working capital further, including calculating the inventory-turnover ratio, the receivables ratio, days payable, the current ratio, and the quick ratio.

One of the most significant uses of working capital is inventory. The longer inventory sits on the shelf or in the warehouse, the longer the company’s working capital is tied up.

When not managed carefully, businesses can grow themselves out of cash by needing more working capital to fulfill expansion plans than they can generate in their current state. This usually occurs when a company has used cash to pay for everything, rather than seeking financing that would smooth out the payments and make cash available for other uses. As a result, working capital shortages cause many businesses to fail even though they may actually turn a profit. The most efficient companies invest wisely to avoid these situations.

Analysts commonly point out that the level and timing of a company’s cash flows are what really determine whether a company is able to pay its liabilities when due. The working-capital formula assumes that a company really would liquidate its current assets to pay current liabilities, which is not always realistic considering some cash is always needed to meet payroll obligations and maintain operations. Further, the working-capital formula assumes that accounts receivable are readily available for collection, which may not be the case for many companies.

It is also important to understand that the timing of asset purchases, payment and collection policies, the likelihood that a company will write off some past-due receivables and even capital-raising efforts can generate different working capital needs for similar companies. Equally important is that working capital needs vary from industry to industry, especially considering how different industries depend on expensive equipment, use different revenue accounting methods, and approach other industry-specific matters.

Finding ways to smooth out cash payments in order to keep working capital stable is particularly difficult for manufacturers and other companies that require a lot of up-front costs. For these reasons, comparison of working capital is generally most meaningful among companies within the same industry, and the definition of a “high” or “low” ratio should be made within this context.

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Social Structure

Social structures are seen all forms of social interactions. These social interactions are the ones responsible for shaping social reality. Social structure can be broken down into five elements. These elements include social roles, statuses, groups, social institutions and social networks (Lamm & Schaefer, 1998). These elements form the foundation of social structure. According to social sciences, social structure can be defined as a social arrangement where actions of an individual person both and emerge and determine them (Schaefer, 2012). Social structure is more about macrosociology since the society is considered as an institution rather than individual entities. However, some sociologists have come up with several scales of a social structure such as macro scale which features social structure or a large social group. The meso scale is concerned with social network structure. This scale examines the ties between organizations or groups. The micro scale is concerned with how norms define the behaviors observed on individuals in a given social system (Lamm & Schaefer, 1998).

Social Structure Discussion

When one talks about status, many people usually think it has to do with influence, fame or wealth. However, talking about status in terms of sociology refers to a wide range of positions that are socially defined in a given society from the highest to the lowest. For instance, in a society like ours, someone can have the status of a teenager, doctor or even the president. It is also possible for someone to have two or more statuses at the same time since one can be a doctor as well as a neighbor and a resident of New York. There are also two types of statuses, achieved and ascribed. An ascribed status is a status that one is given by a society without considering the person’s talents or achievements. The assignment is usually done after birth (Schaefer, 2012). Many conflict theorists are concerned with ascribed statuses. In my society, my ascribed statuses include being a daughter, female, sister, and 27 years old among others. On the other hand achieved statuses are the ones one get after achieving something in a society. My achieved statutes include being a student, friend, classmate, teammate, and roommate.

In many cases, there is little one can do in order to change their ascribed statuses. However, one gets achieved statutes through one’s efforts. Being a computer expert is through one’s effort. In order for one to acquire an achieved status, one must work for it. As demonstrated earlier, one can have many statuses, but there is always a master status in one’s social life in a given society. A master status has many and conflicting statuses. The master status can elevate or lower someone’s status in the society. A master status dominates all others and is the one that is responsible for shaping someone’s position in the society (Luckmann & Berger 2011). In my case, my current master status is being a student. In my society, everybody knows that I am a student and everybody identifies me with schooling. Therefore, I can conclude that my master status is being a student.

Some roles associated with the statutes mentioned above include the fact that as a daughter I have to be answerable to may parents and elders in the society. As a student I have to attend and work hard in school. I also have to act as female is expected while at the same time ensuring that I am the best sister to my siblings. There are times when all or some of these roles come into direct conflict with each other. For instance, there was a time I was studying for a very important exam and my younger sister wanted me to take her to the park at the same time. The statuses of being a student and being a sister were in direct conflict and I had to make a tough decision whether to be a good student or be a good sister (Ebaugh, 1988). The final decision was to refuse my sister’s request.

I belong to several groups in our society’s social structure. My primary group is our study group at school which has six members. We meet everyday and share ideas. Most of the meetings are study oriented although we also talk about other things in general. My secondary group is our community’s welfare group. This group has more than 50 members and we usually meet once or twice per month. Most of the issues that we discuss are how we can improve our community.

My study group holds great value to attendance and respect among the members. The members of the group are supposed to be polite and should treat each other with respect. Looking down upon another member is frowned upon. The idea behind the group is not only to help each other academically, but also help each other socially. The community welfare group (social structure) is meant to create awareness among the members about problems that affects communities. Attendance is not mandatory although there are values and norms that one is expected to portray. They include respect among the members and respect for authority.

Status, mass media, roles and groups have played a big role in shaping my self-identity, behaviors and values. The statutes have helped me identify myself. These statutes play a big role in the way I behave and the way I present myself to the public. There are certain values that are expected of me in the society and I have to uphold them. The same goes for social media and social structures in general. Mass media has also played a big role in my life. Social networking has eased the way I communicate and exchange ideas with members of my groups. It has also eased the ways in which I can express myself.

Conclusion

Statutes and groups not only serve elements of a given social structure such as roles, they also play part in linking an individual to the larger society. Each and every person belongs to a particular unique group. The social network makes it possible for people from different groups to interact and form larger relationships. This is why social networks are considered as one of the key elements of the social structure alongside other like statutes.

References

Ebaugh, H (1988) Becoming an ex: The process of role exit. Chicago, IL: University of Chicago Press, Ltd.

Lamm, R. & Schaefer, R (1998) Sociology: Instructor’s manual. New York, NY: McGraw-Hill Education.

Luckmann, T. & Berger, P (2011) The social construction of reality: A treatise in the sociology of knowledge. Boston, MA: Open Road Media.

Schaefer, R (2012) Sociology: A brief introduction. New York, NY: McGraw-Hill Education.