First, let us keep one thing in mind i.e. Insurance is not just risk management.It is also an instrument of social security.It is not just meant to be for prosperous and civilized people in rich and developed countries.It is much more crucial for the less well-off for the emerging economies like India.Unfortunately, India has a status of a country which is under-insured.India’s insurance depth measured as the percentage of insurance premium collected , as a percentage of GDP, stand out at just 3.9 percent, which is much less than the average insurance penetration of a developed country which is around 9 percent.With 3.9 percent insurance penetration, India stands sightly ahead of China, which has insurance penetration of 3 percent.When it comes to “insurance density” measured as per capita insurance premium, India stands much backward with a value of $53 whereas, the advance country average lies between $2,000 to $7,000.By this measure, even China outscores India with having an insurance density of $178.

The lagging behind of India and China (on the key measures of insurance coverage) when compared to advance countries could be easily reasoned.Some of the reasons are:
*Both markets were long the exclusive domains of state-owned companies.
*Both countries have recently and only partially liberalized foreign investment.This is the major cause behind the  small market share of the foreign insurance companies.

India’s insurance market is not competitive enough.Markets being almost oligopolistic in nature facilitate handsome profit making for the companies, especially state-owned,and they have little incentive to reach out to the masses which are overly under-insured.

Our government has shown strong commitment to extend the coverage of insurance to India’s poor, in the Union Budget.The new insurance schemes have been announced in the Budget for lower income groups as part of the governments attempt to formulate a comprehensive social security system.A premium of just RS 12 a year will bestow an individual with an accident insurance worth RS 2 lakh, under the Suraksha Bima Scheme.Under the Jeevan Jyoti Bima Yojna, an individual can get a life insurance cover worth RS 2 lakh, just by paying RS 330 per year.The state-owned insurance companies, like LIC and GIC, will roll out these schemes.

Even so, there is so much more, the government can do.Insurances other than life and accident too are the need of the hour, especially for the low income groups.For example, health insurance for every citizen, crop insurance for every farmer etc.But the problem lies in the inability and unwillingness of insurance companies, state-owned as well as private companies, to serve to a larger market.To eradicate this problem, the companies need to be subject to competition, and should have the knowledge to introduce innovative products and the financial might to stay the course in a tough market.The only investors who are capable enough to do this are foreign investors.They have a superior knowledge of products, as they invest their funds across the globe and hence, they understand the market better.They hedge their risk by diversifying their risk market i.e. investing globally.So, if they come, they will offer a premium at a lesser cost compared to Indian insurance companies.Affordability will also increase because of the the presence of the foreign insurance providers.So, if insurance is to extended, the government has to liberalize in an aggressive manner.

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In spite of being so many types of businesses present there, when it comes to management of profit, only the four established drivers help to improve the bottom line.These four renowned drivers are:
*Increasing sales volume
*Increasing price
*Improving margins/contribution
*Reducing fixed costs
They utilize the principles which are going to be covered in this article.

1. Increase sales volume~ One example of this is increasing share of the existing market through discounting or  marketing.Other ways are selling existing products to new markets, offering new products to existing customers and  selling new products to new markets.The latter can be a high-risk but high-return strategy.

2.  Increase prices~ A RS 1 increase in the ‘top line’ goes directly to the ‘bottom line’.Although increasing prices is  one of the most effective strategies to increase profits, it is also one of the most difficult and uncompetitive.One way  to do it is by differentiating i.e. by investing in quality.Another is to charge different prices to different customer  niches.

3. Improve margins/contribution~ This is a key focus for many businesses.One might reduce cost by renegotiating  prices with suppliers or sourcing lower cost components.Simply changing the product mix to higher-margin  products might achieve the desired effect.Sometimes it cn be done by increasing productivity to generate more  output from the same cost of inputs.

4. Reduce fixed costs~ Many businesses cut assumed ‘discretionary’ costs such as  travel, entertainment, research  and product development costs.Whilst these costs may help to improve short-term profit, they often have long-term  consequences that can have a disproportionate effect on long-term profitability.Other methods that help to reduce  long-term fixed cost include investing in efficient administration, more effective staff utilization, optimizing use of  power, negotiating cheaper leases/rents, and of course sourcing cheaper financing.

There is an obvious trade-off between some of these options.The most effective combination of techniques will depend upon the nature of the business.

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The ultimate measure of a business’s cumulative success is its value.valuing a business is an art, and there are a number of different techniques, which may produce different valuations for the same business.Essentially, a business is what someone is willing to pay for it!Some of the techniques used in the valuation of a business are:

*Discounted cash flows (DCF) –  Valuation= present value of estimated future cash flows
Arguably, this is the most accurate method of valuation, but it relies on access to information and the quality of the  estimations used.

*Income multiples-     Valuation = ‘income’ x  multiple
Price/earnings (P/E) ratios are valuation multiples for publicly listed companies.The long-term average P/E  multiple for listed companies is around 15.This means that valuations are on average 15 times earnings.But one  should be aware of the wide variations which take place in P/E ratios, with the economy and across companies,  industries and countries.Unlisted business can use a reduced P/E ratio from a similar listed company, for an  appropriate valuation.The reduction should reflect the difference in selling private versus public company  shares.Revenue multiples are an alternative to earning multiples and use a price/sales ratio.They are useful for    businesses with fluctuating profits or even losses, as revenue should be more stable.

*Asset based valuations –      Valuation = net assets value
This method is a useful minimum benchmark of a business’s value.The value of net assets in the balance sheet is  often based on historic costs, which do not fully reflect the future growth potential of a business.

*Valuing a business for sale – Valuations are rarely the actual price paid by a buyer in the event of a business  sale.The range of values are used by buyers and sellers of businesses simply as a starting point for  negotiations.Other factors affecting value are:

>>The strategic reasons for buying or selling.
>>The number of competing buyers and sellers
>>The negotiation skills of both buyers and sellers.
>>The state of the economy.
>>If the purchase price is paid in cash or in shares.
>>The views of different owners – If they all agree to the sale.
>>If the valuation is for the whole or part of a business.

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A balance sheet summarizes what a business owns and what it owes.It is one of the key financial statements and is a snapshot of the financial position of a business at a point in time.

*What a business owns: The top half of the balance sheet contains the different assets a business owns, which are:
>>Long-term(non-current) assets, such as property, plant and  equipment, intangibles and investments.
>>Short-term(current) assets, such as inventory, money owned by customers and cash.

*What a business owes: The  bottom half of the balance sheet contains the different liabilities a business owes to      shareholders and other third parties, which are:
>>Equity, which consists of  share capital and retained earnings.”Retained earnings” or “retained profits” are  unspent or non-distributed profits, which are retained in a business for future use.They effectively belong to the  shareholders and are therefore a liability of the business.
>>Long-term(non-current) liabilities, such as loans from a bank.
>>Money owed to suppliers and the other creditors.

*Why a balance sheet balances: The top half of the balance sheet will equal the bottom half of the balance sheet due  to the principle of double entry book keeping – every debit has an equal and opposite credit.A business’s assets (its  debits) will equal its liabilities(its credits).The exact format of a balance sheet will depend upon the type of business  and associated accounting conventions.

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If we put it simply, profit is income less costs.However, whereas the definition of income is distinctly consistent, the definition of costs can differ from person to person and nation to nation.Consequently,  there are different and often conflicting measures of profit.Even, profit has different names .Sometimes people use the terms earnings or income   interchangeably for profit.When discussing profit with other people, it is smart to confirm which definition is being used.Some of the most common definitions are outlined here:

*Gross Profit- The first measure of profit shown on an income statement .It is calculated by deducting “cost of sales”  from “revenue”.”Cost of sales” are the direct costs of sales i.e. the wholesale cost of purchase for a retailer.Therefore,  the gross profit is the direct profit of a business.

*Operating Profit- It is the second measure of profit shown on an income statement.It is calculated by deducting      indirect operating costs (such as distribution and administration) from gross profit.Operating profit is also known  as results from operating activities or EBIT (earnings before interests and tax).

*Net Profit- Often referred to as “the bottom line”, as traditionally it was the bottom figure on an income  statement.There are, however, differences in how net profit is calculated.The most common definitions are: profit  before tax and after interest costs; and profit after tax and interest costs.

*Contribution- The above measures of profit are derived from financial reporting, where distinctions are made  between direct and indirect costs.For internal management purposes, using fixed and variable costs to calculate  profit can provide a more useful measure.A key measure of profit for management accountants is “contribution”,  which is calculated as revenue less variable costs.Fixed costs are deducted from contribution to arrive at net profit.

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Every year, most businesses produce a budgeted balance sheet and income statement for the forth coming financial year.Budgets specify each asset, liability, income and expense item in detail.Budgets are mainly used to plan for the future and as a benchmark against which to assess actual performance.The difference purpose of budgeting are:

*Integration of different activities is done through budgeting e.g. the sales department needs to have a word with the  production department regarding expected sales volume.
*Central coordination of budgets are performed to ensure the best allocation of limited resources across a business.
*Budgeting allocates responsibility .There will be a number of budget holders who are allocated responsibility for  part of the overall budget.Each budget holder will be aware of the business’s goals and their contribution in working  towards them.
*Setting motivating budget targets for each budget holder will bolster a business to control its direction and  subsequently evaluate the performance of each budget holder.
*For larger businesses the budget is used to communicate a forecast of future financial results to investors.

Depending on the size of a business, budgets are divided up into budget centers, each with a budget holder who is responsible for setting and achieving the budget for their centre.There are several levels of responsibility for budget holders:

*The majority of budget holders are cost centres and just manage costs.
*Revenue centres, for example sales teams, are responsible for generating income.
*Profit centres e.g. retail outlets  of a large organisation are responsible for both revenues and costs.
*Investment centres, for example semi-autonomous divisions of a major corporation, are responsible for profit as    well as assets and liabilities.

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Businesses invest in the current opportunities in return for future cash flows.However, cash flows are worth more today than they could be in the future.This concept of giving preference to present instead of future is known as Time Value of Money.Now, the question arises, why is money worth more now to a business than in the future?Cash tied up in investments  is a cost to  a business because of the given factors:

*The business could have earned interest on the money if the money was kept in a bank account.
*The business will be paying interest if it has to borrow the money   for the investment..
*Inflation erodes the value of future cash flows compared to their current value.\
*The business could have potentially earned higher returns from alternative investment opportunities.
*Until the cash from the investment is actually received there is a risk that it may not  be received, or less may be  received than expected.

This cost is known as the “cost of capital”.A good starting point to put a value on this cost is the level of return required by a business”s investors, such as banks or shareholders.
Let’s say the cost of capital (or return required by investors) is 10% per year. this means that Rs 100 invested now should generate at least Rs 10 a year and be worth Rs 110 in a year’s time, to satisfy investors.Looking at this another way, if the cost of capital is 10%, receiving Rs 110 in a year’s time is equivalent to receiving Rs 100 now, in monetary terms.Accounting for the time value of money means essentially discounting future cash flows back to their   equivalent present value i.e. what they are worth now versus future.

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As the name suggests, it is a cycle which shows the operation of cash in a business.In other words, the very term “cash operating cycle” is nothing but the length of time period between paying out cash for acquiring inputs and receiving cash by selling out goods and services.It is also referred as the Working Capital Cycle or Cash Conversion Cycle.Basically, it is the time elapsed between receiving raw materials from inventory and once they are processed, making them available in the  market for sale to receive cash.

It is inevitable for all the business to understand, measure, control finance their cash operating cycle.Being aware of the cash operating cycles of the  customers, suppliers or even competitors prove to be very contributing to the business.It is usually measured in days.

Inventory of     >>   Conversion of    >>     Inventory of              >>      Receivable collection
raw materials            raw materials              finished materials                       period
^                                                                                                                                   ^
^                                                                                                                                   ^
cash paid out                                                                                                            cash received

Operating cycle for different business units:

*Service businesses- A consultancy firm working on long term projects usually has lots of money owed to them for  the work-in progress which has not been billed and have long collection period.The main input cost for these  would  be the consultants, having no payment period.But a small firm will have problems financing long cash operating  cycles.So, they prefer to ask for stage payments from their clients.

*Seasonable businesses- Seasonable businesses like greeting card manufactures have fluctuating operating cycles.In  these, the inventories gets build up gradually as the production continues throughout the year.Trade receivables will  increase from a low start as retailers stock up for the peak sales season, but may not pay until after the season.The  suppliers’ payment period will be negligible and therefore seasonal manufacturers will require several months of  financing.

*Retailers- A large retailer such as a supermarket will have a relatively low finished goods inventory period and  minimal receivables as the majority of their sales are in cash.In addition, due to their size and purchasing power  they can negotiate extended payment terms with suppliers.Therefore, some supermarkets will actually have a  negative cash operating cycle, in that they receive cash from customers before they have to pay suppliers.

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The most usual reason behind the failure of any business is lack of cash instead of lack of profit, which is the most common miss-concept among the people.So many failed businesses, when analysed prove to be highly profitable but running out of cash acts as the culprit behind their failure.The points which make the idea of maintaining sufficient cash balance reasonable are:

*Profitability and Liquidity- We all know that where profitability is the amount gained by a business, liquidity is  characterized by the capability of a business to meet its expenses and debts whenever they fall due.Liquidity plays a  substantive role in the financial stabilization of a business.If a business fails to manage liquidity, it will not be able to  pay its debt holders and consequently it will be bankrupted.

*Cash performs as Oxygen- If we consider an analogy of food and Oxygen then, if profit is like food, cash resembles  with Oxygen.One can sustain his life without food for several days but without Oxygen, not even few minutes.So, in  the short run, a business can outlive without profit but without cash, it just can not.

*When it comes to becoming cashless- Generally, many businesses do not put emphasis on their liquidity.These  businesses are not concerned about the realism in the prediction of their cash income and expenses.They just keep  on misjudging their income and expenses up to extremums.Also, most of the businesses do not regularly and utterly  forecast their cash flows and  anticipate problems, which are to be encountered.And, when they become cashless, it  becomes too late to overcome.

*Goals to be set up- The major challenge for running a successful business is to meet the ampleness of cash flows and  loftiness of profits.But its really hard to hit the nail on the head, so one should focus at maintaining cash flow in  short term and generating profit in medium and long terms.

*Appropriate Cash Balance- A business should unveil an optimum cash balance which must be maintained  throughout in order to meet all the short term expenses and to invest the cash in more profitable plans.

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As we all know, the Indian Financial Sector took a great leap in the year 1991, reasons being the financial reforms and Liberalization policy.consequently, the volume of business in primary and secondary sectors grew significantly in a short span of time.But Globalization, which was a part of the same reform process impacted Indian Financial System is a different way too, i.e. It made the Indian Financial System quite vulnerable to the external impacts.In order to tackle these frequent disturbances, which the crests and troughs in the wave of globalization were creating in the medium of finance, a strong, autonomous, statutory organization was much needed to facilitate the smooth functioning of the Indian Financial System.

Securities and Exchange Board of India(SEBI) as a cure to all the anticipated financial illness, came into being on April 12,1988, with the objective to protect the interest of investors in securities and to promote the development of, and to regulate the securities market.But, it became a statutory body in 1992.With this, the regulatory powers of SEBI were enhanced through certain amendments. SEBI  is a fully autonomous body, under ministry of Finance, government of India.

SEBI was mainly established in order to eradicate the confusion which could be created among market participants if we would be having multiple regulatory bodies.Through the SEBI, the regulation model which has been introduced in India is one in which every aspect of securities market regulation is entrusted to a single highly transparent and independent organization.SEBI is a body of six members comprising the chairman, two finance officials from central government, two members who are professionals having a good sort of experience in the securities market, and one member from the RBI.The work of the SEBI has been divided into five operational departments,headed by the executive directors who report to the chairman.The departments in the SEBI are:

*The Primary Market Policy, Intermediaries, Self-Regulatory Organizations, and Investor Grievance and Guidance  Department.

*The Issue Management and Intermediaries Department.

*The Secondary Market Policy, Operations and Exchange Administration, New Investment Product and Insider    Trading Department.

*The Secondary Market Exchange Administration, Inspection and Non-member Intermediaries Department.

*Institutional Investment (Mutual Funds and Foreign Institutional Investment), Mergers and Acquisitions, Research  and Publications, and International Relations and IOSCO Department.

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