Download - Finance management lecture presentations
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CAIIB-FM-Module D topics
Marginal Costing
Capital Budgeting
Cash BudgetWorking Capital
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COSTING
Cost accounting system provides releventinformation about cost
Aim : best use of resources and maximization
of returns cost = amount of expenditure incurred(
actual+ notional)
Purposes: know about profit from each
job/product/division/segment. Pricing decision+control +profit planning +inter firmcomparison
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Marginal costing
Marginal costing distinguishes betweenfixed cost and variable cost
Marginal cost is nothing but variable costof additional unit
Marginal cost= variable cost
MC= Direct Material + Direct Labour+Direct expenses
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Marginal costing problems
Sales (-) variable cost (=)contribution
Contribution(/ divided by) sales(=) C.S. Ratio
Contribution and Fixed costs
determine the Break even point Fixed Cost (/ divided by)
contribution per unit= break even units
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Basic formulaSales price (-) variable cost= contribution
SP less VC = Contribution
10 6 = 4
9 6 = 3
8 6 = 2
7 6 = 1
6 6 = 05 6 = (1)
4 6 = (2)
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Marginal costing problems
SP = Rs.10, VC =Rs.6 Fixed CostRs.60000
Find
- Break even point (in Rs. & in units)
- C/S ratio
- Sales to get profit of Rs.20000
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Marginal costing problems
Sales Rs.100000
Fixed Cost Rs.20000
B.E.Point Rs.80000 What is the profit ?
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Management decisions- assessing profitabilityCONTRIBUTION/SALES=C.S.RATIO
Product sp vc Contribtion c/s Ratio % ranking
A 20 10 10 10/20 50% 1
B 30 20 10 10/30 33% 2
C 40 30 10 10/40 25% 3
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DECISION when limiting factors
SP Rs.14 Rs.11
VC 8 7
Contribution
Per unit
6 4
Labour hr. pu 2 1
Contri.per hr 3 4
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Other managerial DECISIONS
Make or buy decisions
Close department
Accept or reject order
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Marginal costing
cost-volume-profit analysis is reliant upon aclassification of costs in which fixed and variablecosts are separated from one another. Fixed
costs are those which are generally time relatedand are not influenced by the level of activity.
Variable costs , on the other hand, are directlyrelated to the level of activity; if activity
increases, variable costs will increase andvice-versa .
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Marginal costing
USES OF COST-VOLUME-PROFIT ANALYSIS
The ability to analyse and use cost-volume-profitrelationship is an important management tool. Theknowledge of patterns of cost behaviour offers insights
valuable in planning and controlling short and long-runoperations. The example of increasing capacity is a goodillustrations of the power of the technique in planning.
The implications of changes in the level of activity can bemeasured by flexing a budget using knowledge of cost
behaviour, thereby permitting comparison to be made ofactual and budgeted performance for any level ofactivity.
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Marginal costing
LIMITATIONS OF COST-VOLUME-PROFITANALYSIS
A major limitation of conventional CVP analysis that wehave already identified is the assumption and use of
linear relationships. Yet another limitation relates to thedifficulty of dividing fixed costs among many productsand/or services. Whilst variable costs can usually beidentified with production services, most fixed costusually can only be divided by allocation and
apportionment methods reliant upon a good deal ofjudgement. However, perhaps the major limitation of thetechnique relates to the initial separation of fixed andvariable costs.
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Marginal costing
ADVANTAGES AND DISADVANTAGES OFMARGINAL COSTING
ADVANTAGES 1. More efficient pricing decisions can be made, since
their impact on the contribution margin can bemeasured. 2. Marginal costing can be adapted to all costing
system. 3. Profit varies in accordance with sales, and is not
distorted by changes in stock level. 4. It eliminates the confusion and misunderstanding
that may occur by the presence ofover-or-under-absorbed overhead costs in the profit andloss account.
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Marginal costing
5. The reports based on direct costing are far moreeffective for management control than those based onabsorption costing. First of all, the reports are moredirectly related to the profit objective or budget for theperiod. Deviations from standards are more readily
apparent and can be corrected more quickly. Thevariable cost of sales changes in direct proportion withvolume. The distorting effect of production on profit isavoided, especially in month following high productionwhen substantial amount of fixed costs are carried in
inventory over to next month. A substantial increase insales in the month after high production underabsorption costing will have a significant negative impacton the net operating profit as inventories are liquidated.
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Marginal costing
6. Marginal costing can help to pinpointresponsibility according to organisational lines:individual performance can be evaluated onreliable and appropriate data based on current
period activity. Operating reports can beprepared for all segments of the company, withcosts separated into fixed and variable and thenature of any variance clearly shown. Theresponsibility for costs and variances can then
be more readily attributed to specific individualsand functions, from top management to downmanagement
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Marginal costing
DISADVANTAGES OF MARGINAL COSTING 1. Difficulty may be experienced in trying to segregate
the fixed and variable elements of overhead costs for thepurpose of marginal costing.
2. The misuse of marginal costing approaches topricing decisions may result in setting selling prices thatdo not allow the full recovery of overhead costs.
3. Since production cannot be achieved withoutincurring fixed costs, such costs are related toproduction, and total absorprtion costing attempts tomake an allowance for this relationship. This avoids thedanger inherent in marginal costing of creating theillusion that fixed costs have nothing to do withproduction.
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CAPITAL BUDGETING
It involves current outlay of funds in theexpectation of a stream of benefits
extending far into the futureYear Cash flow
0 (100000)
1 300002 40000
3 50000
4 50000
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CAPITAL BUDGETING
A capital budgeting decision is one that involves theallocation of funds to projects that will have a life ofatleast one year and usually much longer.
Examples would include the development of a major
new product, a plant site location, or an equipmentreplacement decision.
Capital budgeting decision must be approached withgreat care because of the following reasons:
1. Long time period: consequences of capital expenditureextends into the future and will have to be endured for alonger period whether the decision is good or bad.
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CAPITAL BUDGETING
2. . Substantial expenditure: it involves largesums of money and necessitates a carefulplanning and evaluation.
3. Irreversibility: the decisions are quite often
irreversible, because there is little or no secondhand market for may types of capital goods.
4. Over and under capacity: an erroneousforecast of asset requirements can result in
serious consequences. First the equipmentmust be modern and secondly it has to be ofadequate capacity
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CAPITAL BUDGETING
Difficulties
There are three basic reasons why capital expendituredecisions pose difficulties for the decision maker. Theseare:
1. Uncertainty: the future business success is todaysinvestment decision. The future in the real world is neverknown with certainty.
2. Difficult to measure in quantitative terms: Even ifbenefits are certain, some might be difficult to measurein quantitative terms.
3. Time Element: the problem of phasing properly theavailability of capital assets in order to have them comeonstreamat the correct time.
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CAPITAL BUDGETING
Methods of classifying investments
Independent Dependent Mutually exclusive Economically independent and statistically
dependent Investment may fall into two basic categories,
profit-maintaining and profit-adding when
viewed from the perspective of a business, orservice maintaining and service-adding whenviewed from the perspective of a government oragency.
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CAPITAL BUDGETING
Expansion and new product investment
1. Expansion of current production to meetincreased demand
2. Expansion of production into fields closelyrelated to current operation horizontalintegration and vertical integration.
3. Expansion of production into new fields not
associated with the current operations.4. Research and development of new products.
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CAPITAL BUDGETING
Reasons for using cash flows
Economic value of a proposed investment can beascertained by use of cash flows.
Use of cash flows avoids accounting ambiguities
Cash flows approach takes into account the time valueof money
For any investment project generating either expandedrevenues or cost savings for the firm, the appropriate
cash flows used in evaluating the project must beincremental cash flow.
The computation of incremental cash flow should followthewithand withoutprinciple rather than the beforeand afterprinciple
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Types of capital investments
New unit
Expansion
Diversification Replacement
Research & Development
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Significance of capital budgeting
Huge outlay
Long term effects
Irreversibility Problems in measuring future cash flows
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Facets of project analysis
Market analysis
Technical analysis
Financial analysis Economic analysis
Managerial analysis
Ecological analysis
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Financial analysis
Cost of project
Means of finance
Cost of capital Projected profitability
Cash flows of the projects
Project appraisal
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Decision process
PLANNING PHASE
EVALUATION PHASE
SELECTION PHASE
IMPLEMENTATION PHASE
CONTROL PHASE
AUDITING PHASE
INVESTMENT OPPORTUNITIES
PROPOSALS
ONLINE PROJECTS
PROJECTS
ACCEPTED PROJECTS
PROJECT TERMINATION
PROPOSALS
Improvementinplanning&Evalu
ationprocedure
Improvementinplanning&Evalu
ationprocedure
NEWIN
VESTMENTOPPOR
TUNITIES
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Methods of capital investmentappraisal
DISCOUNTING NON-DISCOUNTING
Net present value (NPV) Pay back period
Internal rate of return(IRR)
Accounting rate ofreturn
Profitability Index orBenefit cost ratio
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Present value of cash flow stream-(cash outlay Rs.15000)@ 12%
Year Cash flow PV factor@12%
PV
1 1000 0.893 893
2 2000 0.799 15943 2000 0.712 1424
4 3000 0.636 1908
5 3000 0.567 17016 4000 0.507 2028
7 4000 0.452 1808
8 5000 0.404 2020
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Present value of cash flow stream-(cash outlay Rs.15000 )@10%
Year Cash flow PV factor@10%
PV
1 2000 0.909 1818
2 2000 0.826 16523 2000 0.751 1502
4 3000 0.683 2049
5 3000 0.621 18636 4000 0.564 2256
7 4000 0.513 2052
8 5000 0.466 2330
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Methods of capital investmentappraisal
Solution IRR NPV
Project A 20% 309
Project B 15% 1441
These project are mutually exclusive
The IRR ranks project A higher, whereas the NPV ranksproject B first.
The conflict arises because B is ten times the size of A.This gives a higher NPV but in relative terms it is less
profitable with a lower percentage return. Naturally, B ispreferable because it gives the greatest increase inshareholders wealth.
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Methods of capital investmentappraisal
The advantages of IRR over NPV are: 1. It gives a percentage return which is easy to
understanding at all levels of management. 2. The discount rate/required rate of return
does not have to be known to calculate IRR. Itdoes have to be decided upon at sometimebecause IRR must be compared with something.The discussion as to what is an acceptable rate
of return can however be left until much laterstage. In a NPV calculation the discount ratemust be specified prior to any calculation beingperformed.
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Methods of capital investmentappraisal
The advantages of NPV over IRR are: 1. NPV gives an absolute measure of profitability and hence
immediately shows the increase in shareholders wealth due to aninvestment decision.
2. NPV gives a clear answer in an accept/reject decision. IRRgives multiple answers.
3. NPV always gives the correct ranking for mutually exclusiveproject while IRR may not.
4. NPVs of projects are additive while IRRs are not. 5. Any changes in discount rates over the life of a project can
more easily be incorporated into the NPV calculation.
The NPV approach provides as absolute measure that fullyrepresents in value of the company if a particular project isundertaken. The IRR by contrast, provides a percentage figure fromwhich the size of the benefits in terms of wealth creation cannotalways be grasped.
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The timing of the cash flows is critical for
determining the Project's value.
below the line for cash investments or
above the line for returns.
Rs.51 La kh Rs.51 La kh Rs.61 La kh
Year 1 Year 2 Year 3
Rs.102 lakh
Year 0
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Net Present Value
Year Cash Flow Dis. Factor Present
@10% Value
0 -102 1 -1021 51 0.91 46.36
2 51 0.83 42.15
3 61 0.75 45.83NPV 32.34
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@27% Value
0 -102 1 -102
1 51 0.78740 40
2 51 0.62000 32
3 61 0.48818 30
NPV 0
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The evaluation of any projectdepends on the magnitude of thecash flows, the timing and thediscount rate.
The discount rate is highlysubjective. The higher the rate , theless a rupee in the future would beworth today.
The risk of the project shoulddetermine the discount rate.
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Internal Rate of Return(IRR)IRR is the rate at whichthe discounted cash flowsin the future equal thevalue of the investmenttoday. To find the IRR onemust try different ratesuntil the NPV equals zero.
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BUDGET
Quantitative expression ofmanagement objective
Budgets and standardsBudgetary control
Cash budget
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PROFIT PLANNING
Budget & budgetary control
Marginal costing
CVP and break even pointComparative cost analysis
ROCE
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PRICING DECISIONS
Full cost pricing
Conversion cost pricing
Marginal cost pricingMarket based pricing
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PRICING DECISIONS
PRICING AND ITS OBJECTIVES The objective of pricing in practice will probably
be one of the following: (a) To skim the market (in the case of new
products) by the use of high prices; (b) To penetrate deeply into the market (again
with new products) at an early stage, beforecompetition produces similar goods;
(c) To earn a particular rate of return on thefunds invested via the generating of revenue; and
(d) To make a profit on the product range as awhole, which may involve using certain items inthe range as loss leaders, and so forth.
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PRICING DECISIONS
Full cost pricing The object is to recover all costs incurred
plus a percentage of profit. It is a method
best used where the product is clearlydifferentiated and not in immediate, directcompetition. It would not lend itself tosituation where price tended to bedetermined by the market,
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PRICING DECISIONS
Conversion cost pricing
Conversion cost consists of direct labourcost and factory overhead, ignoring thecost of the raw material on the groundsthat profit should be made within thefactory and not upon materials bought
from suppliers.
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PRICING DECISIONS
Marginal cost pricing Briefly it is that cost which would not be incurred if the
production of the product were discontinued. Animportant advantage of differential cost of pricing is the
flexibility it gives to meet special short-termcircumstances, while accepting that full costs must berecovered in the long term. This is by no means alwaysdesirable in the short term. For example, there may besurplus productive capacity in a factory, in which case
any opportunity to accept an order which coversdifferential cost and makes a contribution to fixed costand profit should be accepted. Any contribution is betterthan none.
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PRICING DECISIONS
Market based pricing
This can be based on the value to a customer ofgoods or services and involves variable pricing.It also takes account of the price he is able andwilling to pay for the goods or services.Businesses using this approach develop specialproducts or services which command premium
prices. The other market-based approach is to price on
the basis of what competitors are charging.
O i l
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Operating leverageFinancial leverage
OL= amount of fixed cost in a coststructure. Relationship between sales andop. profit
FL= effect of financing decisions on returnto owners. Relationship between operatingprofit and earning available to equity
holders (owners)
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Working capital
Current assets less current liabilities = networking capital or net current assets
Permanent working capital vs. variable
working capital
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Working capital cycle
cash> Raw material > Work in progress >finished goods > Sales > Debtors >Cash>
Operating cycle it is a length of timebetween outlay on RM /wages /others
AND inflow of cash from the sale of the
goods
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Matching approach to asset financing
Fixed Assets
Permanent Current Assets
Total Assets
Fluctuating Current Assets
Time
$
Short-termDebt
Long-termDebt +EquityCapital
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THE WORKING CAPITAL
CYCLE
(OPERATING CYCLE)
Accounts Payable
Cash
Raw
MaterialsW I P
Finished
Goods
Value Addition
Accounts
ReceivableSALES
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Operating cycle concept
A companys operating cycle typically consists ofthree primary activities: Purchasing resources,
Producing the product and
Distributing (selling) the product.
These activities create funds flows that are bothunsynchronizedand uncertain.
Unsynchronized because cash disbursements (forexample, payments for resource purchases) usually takeplace before cash receipts (for example collection of
receivables).They are uncertain because future sales and costs, which
generate the respective receipts and disbursements,cannot be forecasted with complete accuracy.
Working capital cycleWorking capital cycle
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Working capital
FACTORS DETERMINING WORKING CAPITAL
1. Nature of the Industry2. Demand of Industry3. Cash requirements
4. Nature of the Business5. Manufacturing time6. Volume of Sales7. Terms of Purchase and Sales8. Inventory Turnover9. Business Turnover
10. Business Cycle11. Current Assets requirements12. Production Cycle
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Working capital
Working Capital Determinants (Contd)
13. Credit control14. Inflation or Price level changes15. Profit planning and control16. Repayment ability17. Cash reserves18. Operation efficiency19. Change in Technology20. Firms finance and dividend policy21. Attitude towards Risk
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TYPES OF WORKING CAPITAL
WORKING CAPITAL
BASIS OF
CONCEPT
BASIS OF
TIME
Gross
Working
Capital
Net
Working
Capital
Permanent/ Fixed
WC
Temporary/ Variable
WC
Regular
WC
Reserve
WC
Special
WC
Seasonal
WC
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Working capital
Working Capital Levels in Different Industries A retailing company usually has high levels of
finished goods stock and very low levels ofdebtors. Most of the retailers sales will be for
cash, and an independent credit card company ora financial subsidiary of the retail business (whichon occasions is not consolidated in the groupaccounts). The retailing company, however,usually has high levels of creditors. It pays its
suppliers after an agreed period of credit. Thelevels of working capital required are thereforelow:
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Working capital
Excess of current assets over current liabilities are calledthe net working capital or net current assets.
Working capital is really what a part of long term financeis locked in and used for supporting current activities.
The balance sheet definition of working capital ismeaningful only as an indication of the firms currentsolvency in repaying its creditors.
When firms speak of shortage of working capital they infact possibly imply scarcity of cash resources.
In fund flow analysis an increase in working capital, asconventionally defined, represents employment orapplication of funds.
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Working capital
In contrast, a manufacturing company willrequire relatively high levels of workingcapital with investments in raw materials,
work-in-progress and finished goodsstocks, and with high levels of debtors.The credit terms offered on sales andtaken on purchases will be influenced by
the normal contractual arrangements inthe industry.
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Working capital
Debtors Volume of credit sales Length of credit given Effective credit control and cash collection Stocks Lead time & safety level Variability of demand Production cycle No. of product lines Volume of planned output actual output sales Payables Volume of purchases Length of credit allowed
Length of credit takenDiscounts Short-term finance All the above Other payments/receipts Availability of credit Interest rates
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Working capital
Cash Levels it is necessary to prepare a cash budget where
the minimum balances needed from month tomonth will be defined.
business is seasonal, cash shortages may arise in certainperiods. Generally it is thought better to keep onlysufficient cash to satisfy short-term needs, and toborrow if longer-term requirements occur
The problem, of course, is to balance the cost of thisborrowing against any income that might be obtained
from investing the cash balances. The size of the cash balance that a company might need
depends on the availability of other sources of funds atshort notice, the credit standing of the company and thecontrol of debtors and creditors
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Working capital
Debtors The debtors problem again revolves around the
choice between profitability and liquidity. Itmight, for instance, be possible to increase sales
by allowing customers more time to pay, butsince this policy would reduce the companysliquid resources it would not necessarily result inhigher Profits.
historical analysis or the use of establishedcredit ratings to classify groups of customers interms of credit risk
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Working capital
1. Establish clear credit practices as a matter ofcompany policy.
2. Make sure that these practices are clearlyunderstood by staff, suppliers and customers.
3. Be professional when accepting new accounts,
and especially larger ones.4. Check out each customer thoroughly before you
offer credit. Use credit agencies, bankreferences, industry sources etc.
5. Establish credit limits for each customer... and
stick to them.6. Have the right mental attitude to the control of
credit and make sure that it gets the priority itdeserves.
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Working capital
7. Continuously review these limits when you suspecttough times are coming or if operating in a volatile sector.8. Keep very close to your larger customers.9. Invoice promptly and clearly.10. Consider charging penalties on overdue accounts.11. Consider accepting credit /debit cards as apayment option.12. Monitor your debtor balances and ageingschedules, and don't let any debts get too large or too old.
DIMENSIONS OF RECEIVABLES MANAGEMENT
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DIMENSIONS OF RECEIVABLES MANAGEMENT
OPTIMUM LEVEL OF INVESTMENT IN TRADE RECEIVABLES
Profitability
Costs &
Profitability Optimum Level
Liquidity
Stringent Liberal
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Working capital-FACTORING
FactoringDefinition:
Factoring is defined as a continuing legal relationshipbetween a financial institution (the factor) and a
business concern (the client), selling goods or providingservices to trade customers (the customers) on openaccount basis whereby the Factor purchases the clientsbook debts (accounts receivables) either with or withoutrecourse to the client and in relation thereto controls the
credit extended to customers and administers the salesledgers.
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Working capital-FACTORING
It is the outright purchase of credit approvedaccounts receivables with the factor assumingbad debt losses.
Factoring provides sales accounting service, useof finance and protection against bad debts.
Factoring is a process of invoice discounting bywhich a capital market agency purchases all
trade debts and offers resources against them.
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Working capital-FACTORING
Debt administration:
The factor manages the sales ledger ofthe client company. The client will be
saved of the administrative cost of bookkeeping, invoicing, credit control and debtcollection. The factor uses his computer
system to render the sales ledgeradministration services.
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Working capital-FACTORING
Different kinds of factoring services Credit Information: Factors provide credit
intelligence to their client and supply periodicinformation with various customer-wise analysis.
Credit Protection: Some factors also insureagainst bad debts and provide without recoursefinancing.
Invoice Discounting or Financing : Factors
advance 75% to 80% against the invoice oftheir clients. The clients mark a copy of theinvoice to the factors as and when they raise theinvoice on their customers.
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Working capital-FACTORING
Services rendered by factor Factor evaluated creditworthiness of the customer
(buyer of goods)
Factor fixes limits for the client (seller) which is an
aggregation of the limits fixed for each of the customer(buyer).
Client sells goods/services.
Client assigns the debt in favour of the factor
Client notifies on the invoice a direction to the customerto pay the invoice value of the factor.
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Working capital-FACTORING
Client forwards invoice/copy to factor along withreceipted delivery challans.
Factor provides credit to client to the extent of80% of the invoice value and also notifies to the
customer Factor periodically follows with the customer When the customer pays the amount of the
invoice the balance of 20% of the invoice value
is passed to the client recovering necessaryinterest and other charges. If the customer does not pay, the factor takes
recourse to the client.
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Working capital-FACTORING
Benefits of factoring The client will be relieved of the work relating to sales ledger
administration and debt collection The client can therefore concentrate more on planning production
and sales. The charges paid to a factor which will be marginally high at 1 to
1.5% than the bank charges will be more than compensated byreductions in administrative expenditure.
This will also improve the current ratio of the client andconsequently his credit rating.
The subsidiaries of the various banks have been rendering thefactoring services.
The factoring service is more comprehensive in nature than thebook debt or receivable financing by the bankers.
Working capital INVENTORY
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Working capital- INVENTORYMANAGEMENT
Managing inventory is a juggling act.
Excessive stocks can place a heavy burden onthe cash resources of a business.
Insufficient stocks can result in lost sales, delaysfor customers etc.
INVENTORIES INCLUDE RAW MATERIALS, WIP & FINISHED
GOODS
FACTORS INFLUENCING INVENTORY
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FACTORS INFLUENCING INVENTORYMANAGEMENT
Lead Time Cost of Holding Inventory
Material Costs
Ordering Costs Carrying Costs
Cost of tying-up of Funds
Cost of Under stocking Cost of Overstocking
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Working capital
Cost of Working capital The other aspect of the working capital problem
concerns obtaining short-term funds. Every source offinance, including taking credit from suppliers, has a
cost; the point is to keep this cost to the minimum. Thecost involved in using trade credit might includeforfeiting the discount normally given for promptpayment, or loss of goodwill through relying on thisstrategy to the point of abuse. Some other sources of
short-term funds are bank credit, overdrafts and loansfrom other institutions. These can be unsecured orsecured, with charges made against inventories, specificassets or general assets.
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Working capital
Disadvantages of Redundant or Excess Working Capital
Idle funds, non-profitable for business, poor ROIUnnecessary purchasing & accumulation of inventories
over required level
Excessive debtors and defective credit policy, higherincidence of B/D.
Overall inefficiency in the organization.When there is excessive working capital, Credit
worthiness suffers
Due to low rate of return on investments, the marketvalue of shares may fall
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Working capital
Disadvantages or Dangers of Inadequate or Short WorkingCapital
Cant pay off its short-term liabilities in time.Economies of scale are not possible.
Difficult for the firm to exploit favourable marketsituations
Day-to-day liquidity worsensImproper utilization the fixed assets and ROA/ROI falls
sharply
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Working capital cycle
Example: X Company plans to attain a sales of Rs 5 crores. It has the following information forproduction and selling activity. It is assumed that the activities are evenly spread through out theyear.
(a) Average time raw materials are kept in store prior to issue for production.2months (b) Production cycle time or work-in-progress cycle time. 2months (c) Average time finished stocks are kept in sale in unsold condition 1/2 months (d) Average credit available from suppliers 1 1/2 months (e) Average credit allowed to customer 1 1/2 months
(f) Analysis of cost plusprofit for above sales: % Rs. In Crores Raw Materials 50 2.50 Direct Labour 20 1.00 Overheads 10 0.50 Profit 20 1.00 Total 100 5.00 -----------
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Working capital cycle
Calculation of Wokring Capital Requirement: 1. Total months to be financed to Raw Material
Months Time in raw material store 2 Working progress cycle 2 Finished goods store 1/2 Credit given to customer 1 1/2
6 Less: Credit available from suppliers 1
---------------- Total months to be financed to Raw Materials 4
---------------- 2. Total months to be financed to Labour Production cycle 2 In Finished stock store Credit to customer 1
Total Months to be financed 4
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Working capital cycle
3. Total months to be finacned to overhead Production cycle 2 In finished goods stores Credit to customer 1
------------- 4 Less:Credit from suppliers 1
------------- Total months to be financed 2 4. Maximum working capital required Rs in crores Raw Materials 4 / 12 2.50 0.94 Direct Labour 4 / 12 1.00
0.33 Overheads 2 0.50 0.10
------- Maximum Working Capital 1.37
-------
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Questions for practice
If the average annual rate of return forcommon stocks is 13%, and treasury billsis 3.8%, what is the average market risk
premium? 13.%
3.8%
9.2% None of the above
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Questions for practice
Minimum Stock Levels is calculated as:
a Re-order Level(Average Usage x AverageLead Time)
b Re-order Level + (Average Usage +Average Lead Time)
c Re-order Level(Average Usage + AverageLead Time)
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Questions for practice
Maximum Stock Level is calculated as: a Re-order Level(Minimum Usage x
Minimum Lead Time) + Re-order Quantity.
b Re-order Level + (Minimum x MinimumLead Time)Re-order Quantity.
C Re-order Level(Minimum Usage xMinimum Lead Time)Re-order Quantity.
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Questions for practice
The formulae for Present Value is: 1/ (1 + r) to the power of n
1/ (1r) to the power of n
1 (1 x r) to the power of n
1 (1/r) to the power of n
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Questions for practice
Profitability Index Equals to PV of cash in flow / PV of Cash out flow PV of Initial outlay / PV of Final out lay P I / (1r) to the power of n
None of the above The following is one of the method in
Discounted Cash Flow Techniques: Pay Back Period
Average Rate of Return Discount to Sales Ratio Net Present Value
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Questions for practice
In break even analysis, the break even pointsymbolizes: No profit and no loss situation No profit but loss situation
No loss but profit situation None of the above
Break even in Term Lending is a tool for appraisal.The level of break even should be: Higher LowerAny of the above None of the above
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Questions for practice
A firm has break-even point Units no. of 1000 andfixed cost of .40,000. What is the contribution perunit ? 30 32
36 40
Working capital management involves all but one ofthe following. Identify?:
a)The level of cash needs to be on call at various dates.
b)The level of inventory we need to maintain. c)The period of credit do we grant to our debtors. d)Suppliers Payments. e)Proportion of assets should be financed by long-term funds.
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Questions for practice
Of the following assets, which is generallythe most liquid? Plant and equipment Inventory
GoodwillAccounts receivable
Intangible fixed assets would include Building
Machinery Trademarks Equipment
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Questions for practice
Which of the following is not included in current assets? Accounts receivable Accrued wages Cash Inventories
The main difference between short term and long termfinance is: The risk of long term cash flows being more important than
short term risks The present value of long term cash flows being greater than
short term cash flows
The timing of short term cash flow being within a year or less All of the above
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Questions for practice
The cash budget is the primary short-run financialplanning tool. The key reasons a cash budget iscreated are: To estimate your investment in assets To estimate the size and timing of your new cash flows
To prepare for potential financing needs A and B B and C
Cash inflow in cash budgeting comes mainly from: Collection on accounts receivable Short-term debt Issue of securities None of the above
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Questions for practice
Common sources of short-term financing include: Stretching payables Issuing bonds Reducing inventory
All of the above Factoring refers to:
Determining the aging schedule of the firm's accountsreceivable
The sale of a firm's accounts receivable to another
firm The determination of the average collection period Scoring a customer based on the 5 C's of credit
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Questions for practice
A number of steps could be taken to shorten this operatingcycle. One of them is not true . Choose it The amount of debtors could be cut by a quicker collection of
accounts. Finished goods could be turned over more rapidly. The level of raw material inventory could be reduced or The production period could be lengthened
Firms would need to hold zero cash when: Transaction-related needs are greater than cash inflows Transaction-related needs are less than cash inflows Transaction-related needs are not perfectly synchronized with
cash inflows Transaction-related needs are perfectly synchronized with cash
inflows
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Questions for practice
Change in cost due to change in the volumeof activity is called ----- Fixed CostVariable Cost
Shutdown CostAll of the above
Actual Sales minus Break Even Sales means Profit on Sales
Loss on Sales Margin of Safety Sales None of the above
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Questions for practice
The size of Cash Balance a company should maintainshould depend on: a Sources of funds at short notice b Credit standing of the company c Control of debtors and creditors
d All of the above . EOQ is calculated as:
a Square of 2AC/H where A=stock usage, C=cost ofordering and H= Stock holding cost per unit of cost.
b Square root of 2AC/H where A = Stock usage, C= Cost
of ordering and H=Stock holding cost per unit of cost. c Square root of AC/2H where A=Stock usage, C=Cost of
ordering and H=Stock holding cost per unit of cost.
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Questions for practice
A retail Company normally has High levels of finished goods stock
High levels of debtors
None of the above
The Tandon Working Group introduced theconcept of Project Balance sheet
Maximum permissible Bank Finance Current Asset Management
dCurrent Liability Management
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Questions for practice
Contribution is equal toVariable cost less fixed cost
Sales less fixed cost
Sales less semi variable cost
Sales less variable cost
Break even point can be calculated as: Total Variable Cost / Contribution per Unit
Total Fixed Cost / Variable Cost per Unit Total Fixed Cost / Contribution per unit
Contribution per unit / total fixed cost
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Questions for practice
Master Budget Covers various Products Budget Functional Budget Customer Budget All of the above
A company manufacturing washing machines has annualcapacity for producing 5000 units. The variable cost per unitcomes to Rs.1,600/- and each machine is sold for Rs.2,000/-.Fixed cost amount Rs.5,00,000/-. Break even point in termsof UNITS would be 1,000 units
1,250 units 1,200 units
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Questions for practice
Under Cash Budget System method of Working Capitalis determined by: Ascertaining level of Current Assets Ascertaining level of Current Liabilities Finding Cash Gap after taking in account projected Cash
inflows and outflows All of above
Which of the following investment rules does not usethe time value of the money concept? The payback period
IRR NPV All above
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Questions for practice
Preferably, cash flows for a project are estimated as: Cash flows before taxes Cash flows after taxes Earnings before taxes Earnings after taxes
Money that a firm has already spent or committed tospend regardless of whether a project is taken iscalled: Sunk costs Fixed costs Opportunity costs None of the above
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Questions for practice
The opportunity cost of capital for a riskyproject is
The expected rate of return on a government
security having the same maturity as theproject
The expected rate of return on a welldiversified portfolio of common stocks
The expected rate of return on a portfolio ofsecurities of similar risks as the project
None of the above
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Questions for practice
The payback period rule accepts allprojects for which the payback period is
Greater than the cut-off value
Less than the cut-off value Is positive
An integer
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Your queries
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