Financial management

• 1. Prepared by: Bhargav Joshi Jaypal Chavda Nikit Rajani Jay Raval Vishal Ghoghari Dept. of Business Admin., Bhavnagar University, Bhavnagar. Guided by: Dr. B.C. AJMERA SUBMITTED TO: RECEIVABLE MANAGEMENT CASH MANAGEMENT INVENTORY MANAGEMENT

2. ASPECTS OF MANAGEMENT OF DEBTORS CREDIT POLICY Decision on credit period to be allowed , early payment discount rates etc . CREDIT ANALYSIS Decision on whether credit can be extended to a particular customer . CONTROL OVER RECEIVABLES Step for debtor follow up , faster collection of debtors. 3. IMPORTANT OF PROPER MANAGEMENT OF RECEIVABLE HIGH INVESTMENT LOW INVESTMENT 4. COSTS OF MAINTAINIG RECEIVABLES INTEREST ON INVESTMENT ADMINISTRATIVE COSTS DELINQUENCY COSTS COLLECTION COSTS DEFAULTING COSTS 5. FACTOR AFFECTING CREDIT PERIOD NATURE OF PRODUCT QUANTUM OF SALES CUSTOMS AND PRACTIES FUND AVALIABLE WITH THE COMPANY CREDIT RISK 6. FACTOR ANALYSED BEFORE CREDIT GRANT TO CUSTOMER NATURE OF PRODUCT NATURE OF CUSTOMER QUANTITY PURCHASED VALUE OF SALES CREDIT WORTHNESS OF THE CUSTOMER RISK OF BAD DEBTS 7. IMPORTANT SOURCE OF CREDIT INFORMATION OF CUSTOMER TRADE REFERENCE BANK REFERANCE CREDIT BUREAU REPORT PAST EXPERIENCE PUBLISHED FINANCIAL STATEMENT 8. Basic steps of receivable management Find out the profit Find out the turn over Find out the investment Find out the total cost Find out the next profit 9. A company is selling a product of Rs.10, all credit sales of 30,000 units V.c. is 6 Rs, A.c. is Rs.8, F.c. is 60,000. collection period is 30 days. Company wants to relaxes its credit standards and that will result 15% increase in sales. The average collection period would be increase to 45 days. There is no any bed debt exp. O.c. is 15%. In the right of above case, should the firm relaxe the credit standard? 10. CASH Cash is one of the most liquid and important components of working capital. Holding cash involves cost because the worth of cash held, after a year will be less than the value of cash as on today. Excess of cash balance should not be kept in business because cash is a non-earning asset. Hence, a proper and judicious cash management is of utmost importance in business. 11. What Are The Primary Motive For Cash Management ? PREVENTION IS BETTER THAN CURE TRANSCATION NEEDS SPECULATIVE NEEDS PRECAUTIONARY NEEDS COMPENSATING NEEDS 12. Objectives of cash management Meeting payment schedule Prevent insolvency Relationship is not strained with bank Fostering good Relation Cash discount can be availed Good credit rating Pay unexpected expenses Minimizing funds committed to cash balance High level of cash balance Low level of cash balance 13. Factors determine the required cash balances Short costs expense incurred shortfall of cash Transaction cost brokerage incurred Borrowing cost borrowing to cover the shortage Loss of cash discount A substantial loss because of temporary shortage of cash Penalty rate by banks to meet a shortfall in compensating balance Excess cash balance cost Excessively large cash balance Procurement & management Establishing & operating cash mgt. staff & activity Salary , handling of security etc. Uncertainty & cash management Flood, fire etc. 14. CASH MANAGEMENT MODEL MODEL CAN BE CLASSIFIED INTO THREE CATEGORIES It assume that the demand for cash can be predicted with certainty , provides cost efficient transaction & conversion cost . BAUMOL MODELS C.C.= Tbc Optimum cash balance level which minimizes the cost of cash management MILLER-ORR MODELS M.O. = 3br24i It can be determined through multiple linier programming methods . ORGLERS ANALYTICAL MODELS Maximize profit= a1x1+a2x2 15. Cash budget Statement inflow & outflow cash estimate its short term requirement The cash budget helps the firm to plan for the actual receipt and disbursement of cash. It has three parts namely, cash collections, cash payments & cash balance The company estimates the sales for each period during the planning period 16. Cash management techniques/ process Speedy cash collection Prompt payment by customers Every conversion of payments into cash concentration banking Lock box system Slowing disbursements Avoidance of early payment centralized disbursements 17. Contents Meaning of Inventory Concept of inventory Types of inventory and Reasons for holding inventory Inventory costs Purpose of inventory Tools / Techniques for Inventory control Functions of inventory Reasons for inventory carrying Cost of inventory accumulation Major activities in inventory control Conclusion 18. Inventory refers to a stock of goods, commodities, or other economic resources that are held by firms at a particular time for their future production requirement and for meeting future demands. Inventory management assist organizations in minimizing their inventory cost without compromising on their ability to respond quickly to customer demand. Meaning of Inventory 19. Inventory control refers to the process whereby the investment in materials and parts carried in stock is regulated within pre- determined limits set in accordance with the inventory policy established by the management. 20. Important Of INVENTORY Inventories represent a significant amount of firm's assets. Inventories must be properly managed so that this investment doesn't become too large, as it would result in blocked capital which could be put to productive use elsewhere. On the other hand, having too little or small inventory could result in loss of sales or loss of customer goodwill. An optimum level of inventory, therefore, should be maintained. 21. 3/19/2014 23 Concept of inventory Inventory Can be defined as a usable resources which is physical and tangible. Inventory management aims at maintaining an adequate supply or something to meet the expected demand pattern subject to budgeting considerations. 22. Inventory could be raw-materials, WIP, finished products or the spare parts and other indirect materials. 23. Inventory turnover ratio = Annual demand / Average Inventory - It is an index of business performance. Sound management gives a higher inventory turnover ratio. 24. Types of inventory and Reasons for holding inventory Raw materials Inventory Stores and Spares Work-in-Process Inventory Finished Goods Inventory Maintenance, repair, and operational (MRO) inventory 25. Inventory costs Purchase cost - Cost of purchasing a unit of item Holding (or carrying) costs - Costs for storage, handling, insurance, etc. Setup (or production change) costs - Costs for arranging specific equipment setups, etc. 26. Ordering costs Costs of placing an order, etc. Stock out costs Costs incurred due to shortage of stock, loss of sale etc. 27. Cost Minimization Goal Ordering Costs Holding Costs Order Quantity (Q) C O S T ( Rs.) Annual Cost of Items (DC) Total Cost By adding the item, holding, and ordering costs together, we determine the total cost curve. 28. Purpose of inventory Smooth production Better services to customers Protection against business uncertainties Take advantage of quantity discounts 29. Reasons for Inventories Improve customer service Economies of purchasing Economies of production Transportation savings Hedge against future Unplanned shocks (labor strikes, natural disasters, surges in demand, etc.) To maintain independence of supply chain 30. Reasons Against Inventory Non-value added costs Opportunity cost Complacency Inventory deteriorates, becomes obsolete, lost, stolen, etc. 31. Economic Order Quantity ( EOQ ) model ABC Analysis FSN Analysis HML Analysis Tools / Techniques for Inventory control 32. Functions of inventory Regularizing demand and supply Economizing purchases or productions by lot buying or batch production Allowing Organizations to cope with perishable materials Inventory can store labour 33. Cost of inventory accumulation Disadvantages of inventory accumulation Locking up of working capital More storage space High storage charges High taxes Greater handling and distribution cost Deterioration in quality Disadvantages of inventory depletion Production stoppages Idle machine capacity Burden of fixed overhead Failure to meet delivery order resulting into loss of goodwill 34. Major activities in inventory control Planning the inventory Procurement of inventory Receiving and inspection of inventory Carrying and issuing of inventory Recording the receipts and issues of inventory Follow-up function Material standardization and substitution 35. In nutshell, we can say that the objective of inventory management is to order the right quantity, at the right time without disrupting the production process. Conclusion