January 23, 2024

Finance and Accounting have grown in importance in today’s competitive business environment, where corporate organisations must provide an accurate and fair picture of their financial status. As a result, the use of accounting in the business sector has become an essential aspect. The Company Secretary must offer comprehensive and accurate information about the company’s financial activities to management for decision making. This emphasises the need of keeping accurate, up-to-date, and conforming books of account. Cost and management accounting is a branch of accounting which helps in reducing cost, improving profit and helps in increasing the efficiency of the organisation and provides this information to the management which will help them in improving decision-making. Mainly cost accounting is concerned with managing the cost of production of goods and services where a cost accountant tries to analyse the cost of production and report the deviation so that necessary steps can be taken as per requirement. Cost accounting and management accounting is a very crucial process for the proper utilisation of resources. Cost accounting and management accounting are the branches of accounting that have been developed due to the limitations of financial accounting. Management accounting is concerned with helping managers to take important decisions in the company. So by combining these two terms Cost and management accounting provides information about the financial and operational performance of the organisation which will help in taking valuable decisions for the organisation. Concept of Cost The amount of resources given up in return for particular products or services is referred to as the cost. Money or money’s equivalent represented in monetary terms are the resources given up. The Chartered Institute of Management Accountants, London defines cost as “the amount of spending (real or notional) expended on, or related to a given object or activity”. This activity of a company may be the production of a product or the provision of a service, both of which entail spending under numerous headings, such as materials, labour, miscellaneous expenditures, and so on. A manufacturing organisation is interested in determining the cost per unit of the product created, whereas a service organisation, such as a transportation undertaking, canteen, electrical company, municipality, and so on, is interested in determining the expenses of the service it provides. In its most basic form, the cost per unit is calculated by dividing the total expenditure by the total number of units produced or services delivered. However, this strategy is only effective if the manufacturer only manufactures one product. If the company produces more than one product, the total spending must be divided across the numerous items so that the cost of each product may be determined independently. Even if just one product is produced, it may be important to examine the cost per unit of each expenditure item that contributes to the total cost. When a large number of products are created, the situation gets more difficult, and it is important to break down the cost per unit of each product into several components of expenditure that make up the entire cost. Concept of Cost Management A specialised discipline of accounting known as cost accounting deals with the classification, accumulation, assignment, and control of expenses. Cost accounting is described as follows by the C.I.M.A. London’s Costing terminology: “The creation of budgets, standard costs, and real costs of activities, processes, products, and the study of variations, profitability, or the social use of money.” Cost accounting differs from costing in that the latter merely offers the foundation and data needed to calculate costs. Once the data is made available, costing may be done mathematically using memo statements or by using the integral accounting approach. Objective of Cost Accounting Cost accounting is the systematic recording and analysis of costs in order to determine the cost of each product made or service supplied by an organisation. Information on the cost of each product or service would allow management to determine where to cut expenses, how to set pricing, how to maximise revenues, and so on. Thus, the primary goals of cost accounting are as follows: Analyze and categorise all expenses in relation to the cost of products and operations. To determine the cost of production for each unit, task, operation, process, department, or service and to create a cost standard. Any inefficiencies and the level of different types of waste, whether of materials, time, money, or in the usage of machinery, equipment, and tools, must be reported to management. Analysis of the causes of disappointing outcomes may point to corrective actions. To supply data for periodic profit and loss statements and balance sheets at such intervals, e.g., weekly, monthly, or quarterly, as the management may require during the fiscal year, not only for the entire organisation but also for departments or particular items. Also, in the profit and loss statement, must explain in detail the actual causes for profit or loss disclosed in total. To identify the sources of manufacturing cost savings in terms of processes, equipment types, design, output, and layout. Daily, weekly, monthly, or quarterly updates may be required to guarantee timely and positive action. To offer real cost numbers for comparison with estimates, and to serve as a reference for future estimates or quotations, as well as to aid management in their price-fixing policies. To show how standard costs are produced, what the cost of production should be, and how the actual costs that are finally recorded may be contrasted. To show comparative cost statistics for various time periods and output volumes. To provide information to enable management to make different short-term decisions, such as price quotations to special clients or during a slump, make or buy decisions, allocating priorities to various items, and so on. Importance of Cost Accounting Costing as a Management Tool: Management benefits greatly from cost accounting. It delivers thorough costing information to management in order for them to keep effective control over stores and inventory, boost organisational efficiency, and reduce waste and losses. It makes it easier to delegate responsibility for essential tasks and rate

Royalty payments allow business owners to make money from their ideas or to use well-known brands to sell products. So, what is royalty in business, and why is it important for employers to know? Business owners should understand how royalties work before entering into a royalty agreement as a licensee or licensor. Introduction Royalty refers to a contractual payment by a person for the use of assets belonging to another person. The payment includes royalty for the use of intangible assets, such as copyrights, trademarks, or franchise model agreements. Royalty is also paid for the use of natural resources, such as mining leases. Royalty agreements generally give limited right to use assets or resources. There are two parties to a royalty agreement—the party granting the right to use an asset or resource is the licensor and the party who accepts the right to use and pays for the right is the licensee. Royalty agreements are often meant for commercial exploitation of assets or resources. The person paying royalty generally pays it as a percentage of the turnover or gross receipt. Royalty agreements are legal in nature and can involve elaborate negotiations on the terms and conditions of the grant of right to use. The commonly known royalty agreements are music rights or publishing rights of books in return for a percentage of the sales. Royalty is a passive income stream, providing benefit to people who create intangible assets or work of art. Musicians owning music rights, cinema rights, and authors often grant the right to use their copyrighted material and earn income. Royalty agreement includes licence agreements to use assets or properties in return for a payment. In the case of non-renewable energy sources, royalties are generally paid to the government of the State. An example of royalty paid to the State is mining royalty. Also, in the case of extraction of oil and natural gas, royalties are paid to the State. In respect of television channels, royalties are paid by television channels to satellite companies. What are royalties in business? As a business owner, you need to know what is royalties’ definition and how the meaning of royalties applies to your company. Royalties are fees that one party pays to another in exchange for the use of their intellectual property, land or rights. A person or company can license their ideas, giving other people or companies permission to use their logos, trademarks or products themselves. Royalties are usually a small percentage of business revenue that can be paid out for a certain time period or in perpetuity. They can be negotiated case-by-case to adhere to the needs or wishes of both business parties involved. Why are royalties important to business owners? Royalties in business can be mutually beneficial for both the party who owns the intellectual property and the party who wants to use it. Your business can profit from the use of an idea, product or brand name while enjoying the legal protections of a licensing agreement. You can also earn royalties for your business by licensing your own intellectual property. Royalty financing occurs when a business owner agrees to pay an investor a royalty in exchange for upfront funding. It’s a common way of raising capital to expand a business in exchange for a percentage of profits. Business owners who own and operate a franchise location pay a royalty to the franchise owner in exchange for the use of their business model, branding and products. How do royalties work? Business owners agree on the percentage or flat-rate royalty amount in a licensing agreement that they sign with the owner of the intellectual property or assets. Each licensing agreement or royalty contract should have a description of the intellectual property being licensed and details on how the payment amount will be calculated.  Determining royalty costs- Every licensing agreement has different terms, including a minimum royalty payment, maximum royalty payment or timeframe for payments. Some royalty payments are based on a variable percentage, meaning that the royalty percentage is small when sales are low and increases when sales are high. Royalties can be paid out based on the number of units sold or as a percentage of net revenue or gross sales. How much do franchisees pay in royalties? Royalty costs for franchisees can be anywhere from 4% to 12% of revenue depending on the type of business. These fees are usually collected by the franchisor monthly and are based on a percentage of your total revenue. High-volume franchises, like food franchises, usually have the lowest fees. These monthly royalty payments are where franchisors make their money because over time, they exceed the upfront franchise fees. FAQs How are royalties calculated? Royalties are usually calculated based on a set percentage of revenue. Multiply the total revenue from the intellectual property by the agreed-upon decimal percentage to find the correct amount. What are royalties in business? The business royalties definition can either refer to a payment that you make to another company for use of their protected ideas in your business, or a secondary income stream that your business generates from licensing out its own intellectual property. 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Earnings before interest, tax, depreciation and amortisation (EBITDA) is a financial metric that helps calculate a company’s financial performance and cash flow. EBITDA is a precise calculation of financial performance because it shows earnings before financial and accounting deductions. What Is Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)? EBIDTA is the acronym for Earnings Before interest taxes depreciation and amortization. It is instrumental in determining a company’s overall financial performance. It is a measure of a widely used metric that companies use to measure performance with respect to industry average and competitors. It is a good way to measure the core profit runs but it can be misleading at times as it excludes the cost of capital investments like land. It is sometimes used as an alternative to net income and is a more precise measure of analysing performance because it shows earnings before deductions are made (accounting and financial). It’s not mandatory for companies to disclose their EBITDA legally. It can be worked out using the information provided in the company’s financial statements (as the earnings, interest and taxes are available in the company’s income statement whereas depreciation and amortization are found in the notes to operating profit or in the cash flow statement). Understanding EBIDTA EBIDTA is an earning metric that does not include the different ways in which a company may use debt equity cash or other capital resources to fund its operations. It does not include depreciation and taxes (as the former may not reflect a company’s ability to generate capital whereas the latter can vary from time to time and is affected by multiple conditions which are not directly related to a company’s operating results). While it is not considered part of the generally accepted accounting principles by the SEC but SEC requires that companies that register securities reconcile EBITDA to net income. It is a handy tool for normalising a company’s performance results which makes evaluation easy and quick. It is a useful formula for companies to check their long-term growth potential and showcase it to the investors so they can easily compare it with existing businesses but if misused it can be used to show that a company’s earnings are greater than they are. Negative EBITDA generally represents poor cash flow but a positive one doesn’t always mean that the business has high profitability so you need to check and make note of the factors that have been excluded or included while calculating EBITDA. Components of EBITDA Earning Earning simply refers to the money a company has earned over a certain period. It can be calculated by simply subtracting the operating expenses from the total revenue of the company. Interest This component refers to all the expenses related to borrowing and financing through debt (companies finance their projects by issuing stocks or borrowing money both of which involve interests). Taxes Ebitda does not include taxes while calculating the company’s earnings. Amortization It is the expense related to the eventual expiration of intangible assets like patents. Depreciation Depreciation represents the decrease in the monetary value of tangible assets as time passes. It includes assets like cars, machines etc. The formula for calculating EBITDA There are two ways in which you can calculate EBITDA for understanding the company’s potential growth. Using operating income EBITDA = Operating Income + Depreciation + Amortization EBITDA is calculated by adding operating income depreciation and amortization. Operating income is the profit made by the company (obtained after deducting operating expenses, i.e. the cost of running the daily business) It helps the investors segregate the earnings from the company’s operating performance by excluding interests and taxes. Using net income The formula for calculating EBIDTA using net income is: EBITDA = Net Income + Taxes + Interest Expense + Depreciation + Amortization This formula is used in net income and adds it back to the taxes, interest expenses, depreciation and amortization to find the operating income. Importance of a good EBIDTA A good EBIDTA helps companies get funds and analyse its potential growth in the near future. It generally means that the company is doing well in a particular sector when compared to its competitors or peers. It is not rewarded or punished for the same. Limitations of EBIDTA While EBITDA is an important metric there are certain limitations and drawbacks to it. First and foremost, it does not fall under generally accepted accounting principles (GAAP) as a measure of financial performance. This is because its calculation can vary from company to company depending on the factors used. Some companies use this loophole to highlight EBITDA over net income as it is more flexible and try to cover up the problems in their financial statements. This is a very important red flag for investors as EBITDA can not be solely relied on when they want to analyse the company’s performance as it can be misleading at times. They might want to look out for companies that suddenly start highlighting EBITDA when they were doing so in the past. It can indicate heavy borrowings or issues in raising capital due to high development costs. Here are some other drawbacks of EBITDA: Exclusion of monetary value of assets There is a common misconception that EBITDA represents cash earnings but it ignores the cause of assets which is a crucial factor for determining cash earnings. It goes on to include only the profit as a function of sales and operation as if the assets and finance provided to the company do not hold any value. Exclusion of working capital Yet another factor that seems to be missing from it is the working capital and the replacement of old equipment. It includes the profit made by selling a product but does not include the inventory required to fill its sales channels. In the case of a software company, EBITDA does not include the cost involved in developing the software versions, its maintenance or the upcoming products. Dynamic starting points While the formula may seem to be simple enough (as it only involves excluding the interest payments, tax charges, depreciation and amortization from the total earnings) but there can be different earning figures which can be used as the starting point for EBITDA. This means that one can use any earning as an initial point which makes EBITDA susceptible to the