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+[{"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## LEARNING OUTCOMES\n\n- \uf0a8 Understanding the meaning, need and importance of working capital for smooth functioning of an entity.\n- \uf0a8 Understanding the factors which determine the working capital.\n- \uf0a8 Learning the methods of estimating working capital.\n- \uf0a8 Understanding  the  various  components  of  working  capital  with  its management.\n- \uf0a8 Understanding methods of receivable management.\n- \uf0a8 Learning  the  methods  of  evaluating  receivables  and  implementation  of credit policy.\n- \uf0a8 Learning the importance and management of treasury (cash) in an entity.\n- \uf0a8 Learning the various sources of working capital finance.\n- \uf0a8 Learning the importance of optimal inventory level and management of payables.\n\na\n\n<!-- image -->"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## This chapter is Divided into Six Units:\n\nUNIT I: Introduction to Working Capital Management\n\nUNIT II: Treasury and Cash Management\n\nUNIT III: Management of Inventory\n\nUNIT IV: Management of Receivables\n\nUNIT V: Management of Payables\n\nUNIT VI: Financing of Working Capital\n\n<!-- image -->\n\n1.\n\na"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## MEANING  AND  CONCEPT  OF  WORKING CAPITAL\n\nIn accounting terms, working capital is defined as the difference between current assets and current liabilities. If we break down the components of working capital, we will find working capital as follows:\n\nWorking Capital = Current Assets -Current Liabilities\n\nCurrent Assets: An asset is classified as current when:\n\n- (i) It  is  expected  to  be  realised  or  intends  to  be  sold  or  consumed  in  normal operating  cycle  of  the  entity  or  within  twelve  months  after  the  reporting period whichever is longer; and\n- (ii) The asset is held primarily for the purpose of trading in the ordinary course of business.\n\nFor the purpose of working capital management, current assets of an entity can be grouped into the following categories:\n\n- (a) Inventory (raw material, work in process and finished goods)\n- (b) Receivables (trade receivables and bills receivables)\n- (c) Cash or cash equivalents (including short-term marketable securities)\n- (d) Prepaid expenses\n\nOther  current  assets  may  also  include  short  term  loans  or  advances,  any  other accrued revenue etc.\n\nCurrent Liabilities: A liability is classified as current when:\n\n- (i) It is expected to be settled in normal operating cycle of the entity or within twelve months after the reporting period whichever is longer; and\n\na"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## FINANCIAL MANAGEMENT\n\n- (ii) It is settled either by the use of current assets or by creation of new current liability.\n\nFor the purpose of working capital management, current liabilities of an entity can be grouped into the following categories:\n\n- (a) Payable (trade payables and bills payables)\n- (b) Outstanding payments (wages &amp; salary, overheads &amp; other expenses etc.)\n\nOther current liabilities may also include short term borrowings, current portion of long-term debts, short term provisions that are payable within twelve months such as provision for taxes etc.\n\nWorking Capital Management is  process  which  is  designed  to  ensure  that  an organization operates efficiently by monitoring &amp; utilizing its current assets and current  liabilities  to  the  best  effect.  Primary  objective  is  to  enable  a  company maintaining  sufficient  cash  flows  in  order  to  meet  its  day-to-day  operating expenses and its short-term obligations.\n\nThe concept of working capital can also be explained through two angles.\n\n<!-- image -->\n\n- (a) Value: From the value point of view, Working Capital can be defined as Gross Working Capital or Net Working Capital.\n\nGross working capital refers to the firm's investment in current assets.\n\nNet  working  capital refers  to  the  difference  between  current  assets  and  current liabilities."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## MANAGEMENT OF WORKING CAPITAL\n\na\n\nA  positive  working  capital  indicates  the  company's  ability  to  pay  its  short -term liabilities. On the other hand, a negative working capital shows inability of an entity to meet its short-term obligations.\n\n- (b) Time: From the point of view of time, working capital can be divided into two categories viz., Permanent and Fluctuating (temporary).\n\nPermanent working capital refers to the base working capital, which is the minimum level of investment in the current assets that is carried by the entity at all times to carry its day-to-day activities. It generally stays invested in the business, unless the operations are scaled up or down permanently which would also result in increase or  decrease  in  permanent working capital. It  is  generally financed  by  long  term sources of finance.\n\nTemporary  working  capital refers  to  that  part  of  total  working  capital,  which  is required by an entity in addition to the permanent working capital.  It is also called variable  or  fluctuating  working  capital  which  is  used  to  finance  the  short-term working capital requirements which arises due to fluctuation in sales volume. For instance,  an  organization  would  maintain  increased  levels  of  inventory  to  meet increased seasonal demand.\n\nThe following diagrams shows Permanent and Temporary or Fluctuating or variable working capital:\n\n<!-- image -->\n\nBoth  kinds  of  working  capital  i.e.  permanent  and  fluctuating  (temporary)  are necessary to facilitate production and sales through the operating cycle.\n\n<!-- image -->\n\na"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 2.1  Importance of Adequate Working Capital\n\nManagement of working capital is an essential task of the finance manager.  He has to ensure that the amount of working capital available is neither too large nor too small for its requirements.\n\nA large amount of working capital would mean that the company has idle funds. Since funds have a cost, the company has to pay huge amount as interest on such funds that are used to invest in surplus working capital. Another way to look at it is that there is an opportunity cost involved where the company could have invested the surplus funds in long term investments and earned some return on the same.\n\nVarious studies conducted by the Bureau of Public Enterprises have shown that one of  the  reasons  for  the  poor  performance  of  public  sector  undertakings  in  our country  has  been  the  large  amount  of  funds  locked  up  in  working  capital.  This results in over capitalization.  Over capitalization implies that a company has too large funds for its requirements, resulting in a low rate of return, a situation which implies a less than optimal use of resources.\n\nOn the other hand, if the firm has inadequate working capital, such firm runs the risk of insolvency.  Paucity of working capital may lead to a situation where the firm may not be able to meet its liabilities. It may also mean that a company may not be hol ding enough inventory in order to meet the customers' demand and hence would lose sales and eventually some reputation as well.\n\nAn organization, therefore, has to be very careful in estimating its working capital requirements.\n\nMaintaining  adequate  working  capital  is  not  just  important  in  the  short-term, sufficient  liquidity  must  be  maintained  in  order  to  ensure  the  survival  of  the business in the long-term as well. When businesses make investment decisions, they must not only consider the financial outlay involved with acquiring the new machine or the new building, etc., but must also take account of the additional current assets that are usually required with any expansion of activity. For e.g.:\n\n- Increased production leads to holding of additional stocks of raw materials and work-in-progress.\n\na\n\n- An increased sale  usually  means  that  the  level  of  debtors  and  the  finished goods inventory requirements will increase.\n- A general increase in the firm's scale of operations tends to imply a need for greater levels of working capital.\n\nA question then arises what is an optimum amount of working capital for a firm? An organization should neither have too high an amount of working capital nor should the same be too low.  It is the job of the finance manager to estimate the requirements  of  working  capital  carefully  and  determine  the  optimum  level  of investment in working capital."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 2.2  Optimum Working Capital\n\nIf a company's current assets do not exceed its current liabilities, then it may run into trouble with creditors that want their money quickly. Not being able to meet its  short-term  obligations,  company  shall  eventually  lose  its  reputation  and  not many vendors would like to do business with them.\n\nCurrent  ratio  (current  assets/current  liabilities)  (along  with  acid  test  ratio  to supplement it) has traditionally been considered the best indicator of the working capital situation.\n\nIt is understood that a current ratio of 2 (two) for a manufacturing firm implies that the firm has an optimum amount of working capital. A higher ratio may indicate inefficient use of funds and a lower ratio would mean liquidity issues as mentioned above. This is supplemented by Quick Ratio or Acid Test Ratio (Quick assets/Current liabilities)  which  should  be  at  least  1  (one)  which  would  imply  that  there  is  a comfortable liquidity position if liquid current assets are equal to current liabilities (where quick assets / liquid current assets refer to current assets less inventory &amp; prepaid expenses).\n\nBankers,  financial  institutions,  financial  analysts,  investors  and  other  people interested in financial statements have, for years, considered the current ratio at 'two'  and  the  acid  test  ratio  at  'one'  as  indicators  of  a  good  working  capital situation.  As a thumb rule, this may be quite adequate.\n\na\n\nHowever,  it  should  be  remembered  that  optimum  working  capital  can  be determined  only  with  reference  to  the  particular  circumstances  of  a  specific situation.   Thus,  in  a  company where the inventories are easily saleable and the sundry debtors are as good as liquid cash, the current ratio may be lower than 2 and yet firm may be sound or where the nature of finished goods are perishable in nature  like  a  restaurant,  then  also  the  organization  cannot  afford  to  hold  large amount of working capital. On the other hand, an organization dealing in products which take a longer production time, may need a higher amount of working capital.\n\nIn  nutshell,  a  firm  should  have  adequate  working  capital  to  run  its  business operations.  Both  excessive  as  well  as  inadequate  working  capital  positions  are dangerous.\n\n<!-- image -->"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 3. DETERMINANTS OF WORKING CAPITAL\n\nWorking capital management is concerned with:\n\n- (a) Maintaining  adequate  working  capital (managing  the  level  of  individual current assets and the current liabilities) and\n- (b) Financing of the working capital.\n\nFor the point a) above, a Finance Manager needs to plan and compute the working capital requirement for its business. And once the requirement has been computed he needs to ensure that it is financed properly. This whole exercise is known as Working Capital Management.\n\nSound financial and statistical techniques, supported by judgment should be used to predict the quantum of working capital required at different times.\n\nSome of the factors which need to be considered while planning for working capital requirement are:"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## MANAGEMENT OF WORKING CAPITAL\n\na\n\n<!-- image -->\n\n1. Need for Cash: Identify the cash balance which allows for the business to meet day-to-day expenses but reduces cash holding costs (example - loss of interest on long term investment had the surplus cash invested therein).\n2. Desired level of Inventory: Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials and hence increases cash flow. The techniques like Just in Time (JIT) and Economic order quantity (EOQ) are used for this.\n3. Receivables: Identify the appropriate credit policy , i.e., credit terms which will  attract  customers,  such  that  any  impact  on  cash  flows  and  the  cash conversion cycle will  be  offset  by  increased  revenue  and  hence  Return  on Capital (or vice versa). The tools like Early Payment Discounts and allowances are used for this.\n\na"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## FINANCIAL MANAGEMENT\n\n4. Short-term  Financing  Options: Inventory  is  ideally  financed  by  credit granted by the supplier. However, depending on the cash conversion cycle, it may be necessary to utilize a bank loan (or overdraft), or to 'convert debtors to cash' through 'factoring' in order to finance working cap ital requirements.\n5. Nature of Business: For e.g. in a business of restaurant, most of the sales are in Cash. Therefore, need for working capital is very less. On the other hand, there would be a higher inventory in case of a pharmacy or a bookstore.\n6. Market and Demand Conditions: For e.g. if an item's demand far exceeds its production,  the  working  capital  requirement  would  be  less  as  investment  in finished goods inventory would be very less with continuous sales.\n7. Technology and Manufacturing Policies: For  e.g.  in  some  businesses  the demand for goods is seasonal ,  in that case a business may follow a policy for  steady  production  throughout  the  whole  year  or  rather  may  choose  a policy of production only during the demand season.\n8. Operating Efficiency: A company can reduce the working capital requirement by eliminating waste, improving coordination, process improvements etc.\n9. Price  Level  Changes  &amp;  Exchange  Rate  Fluctuations: For  e.g. rising  prices necessitate the use of more funds for maintaining an existing level of activity. For the same level of current assets, higher cash outlays are required. Therefore, the effect of rising prices is that a higher amount of working capital is required. Another  example  would  be  unfavorable  exchange  rate  movement  in  case  of imported raw materials would warrant additional cost of same.\n\n<!-- image -->"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 4. MANAGEMENT OF WORKING CAPITAL\n\nThe importance of working capital for an entity can be compared to importance of life blood for a living body or of a lubricant/ fuel for an engine. Working capital is required for smooth functioning of the business of an entity as lack of this may interrupt  the  ordinary  course  of  activities.  Hence,  the  working  capital  needs adequate attention and efficient management. When  we talk about the management, it involves 3 Es i.e. Economy, Efficiency and Effectiveness and all these three are required for the working capital management.\n\nThe scope of working capital management can be grouped into two broad areas:\n\n- (i) Liquidity and Profitability (ii) Investment and Financing Decision.\n\n<!-- image -->"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 4.1  Liquidity and Profitability\n\nFor uninterrupted and smooth functioning of the day-to-day business of an entity, it is important to maintain liquidity of funds evenly. As we have already learnt in previous chapters that each rupee of capital bears some cost. So, while maintaining liquidity the cost aspect needs to be borne in mind.  Also, a higher working capital may be intended to increase the revenue &amp; hence profitability, but at the same time unnecessary tying up of funds in idle assets not only reduces the liquidity but also reduces the opportunity to earn better return from a productive asset. Hence, a trade-off is required between the liquidity and profitability which increases the profitability  without  disturbing  the  day-to-day  functioning.  This  requires 3Es as discussed above  i.e. economy in financing , efficiency in utilisation and effectiveness in achieving the intended objectives.\n\nThe trade-off between the components of working capital can be summarised as follows:\n\n| Component of Working Capital   | Advantages of higher side (Profitability)                                                      | Trade-off (between Profitability and Liquidity)                                       | Advantages of lower side (Liquidity)                                                           |\n|--------------------------------|------------------------------------------------------------------------------------------------|---------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------|\n| Inventory                      | Fewer stock-outs increase the profitability.                                                   | Use techniques like EOQ, JIT etc. to carry optimum level of inventory.                | Lower inventory requires less capital but endangered stock-out and loss of goodwill.           |\n| Receivables                    | Higher Credit period attract customers and increase revenue (but can result in more bad debts) | Evaluate the credit policy; use the services of debt management (factoring) agencies. | Cash sales provide liquidity but fails to boost sales and revenue (due to lower credit period) |\n\na"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## FINANCIAL MANAGEMENT\n\n| Pre-payment of expenses   | Reduces uncertainty and profitable in inflationary environment.                               | Cost-benefit analysis required                                | Improves or maintains liquidity.                                                              |\n|---------------------------|-----------------------------------------------------------------------------------------------|---------------------------------------------------------------|-----------------------------------------------------------------------------------------------|\n| Cash and Cash equivalents | Payables are honoured in time, improves the goodwill and helpful in getting future discounts. | Cash budgets and other cash management techniques can be used | Cash can be invested in some other investment avenues                                         |\n| Payables and Expenses     | Capital can be used in some other investment avenues                                          | Evaluate the credit policy and related cost.                  | Payables are honoured in time, improves the goodwill and helpful in getting future discounts. |"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 4.2  Investment and Financing\n\nWorking capital policy is a function of two decisions, first is investment in working capital and the second is financing of the investment.  Investment in working capital is concerned with the level of investment in the current assets. It gives the answer of  'How  much'  fund  to  be  tied  in  to  achieve  the  organisation  objectives  (i.e. Effectiveness of fund). Financing decision concerned with the arrangement of funds to finance the working capital. It gives the answer 'Where from' fund to be sourced at lowest cost as possible (i.e. Economy). Financing decision, we will discuss this in later unit of this chapter.\n\nInvestment of working capital: How much to be invested in current assets as working capital is a matter of policy decision by an entity. It has to be decided in the  light  of  organisational  objectives,  trade  policies  and  financial  (cost-benefit) considerations. There are not set or fixed rules for deciding the level of investment in  working  capital.  Some  organisations  due  to  its  peculiarity  require  more investment  than  others.  For  example,  an  infrastructure  development  company requires more investment in its working capital as there may be huge inventory in the form of work in process on the other hand a company which is engaged in fast\n\na\n\nfood business, comparatively requires less investment as inventory is of perishable nature &amp; most sales are cash sales.  Hence,  level of investment  depends on  the various factors listed below:\n\n- (a) Nature of Industry: Construction companies, breweries etc. requires large investment in working capital due long gestation period.\n- (b) Types of products: Consumer durable has large inventory as compared to perishable products.\n- (c) Manufacturing  Vs  Trading  Vs  Service: A  manufacturing  entity  has  to maintain  three  levels  of  inventory  i.e.  raw  material,  work-in-process  and finished  goods  whereas  a  trading  and  a  service  entity  has  to  maintain inventory only in the form of trading stock and consumables respectively.\n- (d) Volume of sales: Where  the  sales  are  high,  there  is  a  possibility  of  high receivables as well.\n- (e) Credit policy: An entity whose credit policy is liberal has not only high level of receivables but may require more capital to fund raw material purchases as that will depend on credit period allowed by suppliers."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 4.3  Approaches of working capital investment\n\nBased  on  the  organisational  policy  and  risk-return  trade  off,  working  capital investment  decisions  are  categorised  into  three  approaches  i.e.  aggressive, conservative and moderate.\n\n<!-- image -->\n\n- (a) Aggressive: Here investment in working capital is kept at minimal investment in current assets which means the entity does hold lower level of inventory, follow strict credit policy, keeps less cash balance etc. The advantage of this approach is that lower level of fund is tied in the working capital which results in lower financial costs but the flip side could be risk of stock-outs &amp; that the organisation could not grow which leads to lower utilisation of fixed assets and long-term debts. In the\n\na\n\nlong run firm may stay behind the competitors. This approach would better suit a highly integrated organisation with efficient processes.\n\n- (b) Conservative: In this approach, organisation choose to invest high capital in current  assets.    Organisations  use  to  keep  inventory  level  higher,  follows  liberal credit  policies,  and  cash  balance  as  high  as  to  meet  any  current  liabilities immediately. The advantages of this approach are higher sales volume, increased demand due to liberal credit policy and increase goodwill among the suppliers due to payment in short time. The disadvantages are increased cost of capital, inventory obsolescence, higher risk of bad debts, shortage of liquidity in long run due to longer operating cycles.\n- (c) Moderate: This  approach is in between the above two approaches. Under this approach a balance between the risk and return is maintained to gain more by using the funds in very efficient manner.\n\n<!-- image -->\n\nA conservative policy implies greater liquidity and lower risk whereas an aggressive policy indicates higher risk and poor liquidity.  Moderate current assets policy will fall in the middle of conservative and aggressive policies which most of the firms follow to strike an appropriate balance as per the requirements of their trade or industry. Also, an organization may follow a different policy at different times as may be needed depending on determinants of working capital as discussed earlier."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 4.4 Current Assets to Fixed Assets Ratio\n\nThe finance manager is required to determine the optimum level of current assets so that the shareholders' value is maximized.\n\nA firm needs both fixed and current assets to support a particular level of output.\n\nAs the firm's output and sales increases, the need for current assets also increases. Generally, current assets do not increase in direct proportion to output; current assets may increase at a decreasing rate with output. As the output increases, the firm starts using its current asset more efficiently.\n\nThe level of the current assets can be measured by creating a relationship between current assets and fixed assets.  Dividing current assets by fixed assets gives current assets/fixed assets ratio.\n\nAssuming a constant level of fixed assets, a higher current assets/fixed assets ratio indicates a conservative current assets policy and a lower current assets/fixed assets ratio means an aggressive current assets policy assuming all other factors to be constant.\n\nThe  following  illustration  explains  the  risk-return  trade  off  of  various  working capital management policies, viz., conservative, aggressive and moderate."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## ILLUSTRATION 1\n\nA firm has the following data for the year ending 31 st March, 2022:\n\n|                                    | ( ` )     |\n|------------------------------------|-----------|\n| Sales (1,00,000 @ ` 20)            | 20,00,000 |\n| Earnings before Interest and Taxes | 2,00,000  |\n| Fixed Assets                       | 5,00,000  |\n\nThe three possible current assets holdings of the firm are ` 5,00,000, ` 4,00,000 and ` 3,00,000.  It is assumed that fixed assets level is constant, and profits do not vary with current assets levels. ANALYSE the effect of the three alternative current assets policies.\n\na"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Effect of Alternative Current Assets Policies\n\n|                                             | Conservative ( ` )   | Moderate ( ` )   | Aggressive ( ` )   |\n|---------------------------------------------|----------------------|------------------|--------------------|\n| Sales                                       | 20,00,000            | 20,00,000        | 20,00,000          |\n| Earnings before Interest and Taxes (EBIT)   | 2,00,000             | 2,00,000         | 2,00,000           |\n| Current Assets                              | 5,00,000             | 4,00,000         | 3,00,000           |\n| Fixed Assets                                | 5,00,000             | 5,00,000         | 5,00,000           |\n| Total Assets                                | 10,00,000            | 9,00,000         | 8,00,000           |\n| Return on Total Assets (EBIT\u00f7 Total Assets) | 20%                  | 22.22%           | 25%                |\n| Current Assets/Fixed Assets                 | 1.00                 | 0.80             | 0.60               |\n\nThe  aforesaid  calculation  shows  that  the  conservative  policy  provides  greater liquidity (solvency) to the firm, but lower return on total assets.  On the other hand, the aggressive policy gives higher return, but low liquidity and thus is very risky. The moderate policy generates return higher than Conservative policy but lower than aggressive policy.  This is  less  risky than aggressive  policy  but riskier  than conservative policy. It also reflects inverse relationship between Current Assets / Fixed Assets ratio and Return on Total Assets.\n\nIn  determining the optimum level of current assets, the firm should balance the profitability -solvency tangle by minimizing total costs -Cost of liquidity and cost of illiquidity.\n\n<!-- image -->"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 5. ESTIMATING WORKING CAPITAL NEEDS\n\nOperating cycle is one of the most reliable methods of Computation of Working Capital.\n\nHowever, other methods like ratio of sales and ratio of fixed investment may also be used to determine the Working Capital requirements. These methods are briefly explained as follows:\n\na"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## MANAGEMENT OF WORKING CAPITAL\n\na\n\n- (i) Current Assets Holding Period: To estimate working capital needs based on the average holding period of current assets and relating them to costs based  on  the  company's  experience  in  the  previous  year.    This  method  is essentially based on the Operating Cycle Concept.\n- (ii) Ratio of Sales: To estimate working capital needs as a ratio of sales on the assumption that current assets change with changes in sales.\n- (iii) Ratio of Fixed Investments: To estimate Working Capital requirements as a percentage of fixed investments.\n\nA number of factors will, however, be impacting the choice of method of estimating Working Capital.    Factors  such  as  seasonal  fluctuations,  accurate  sales  forecast, investment cost and variability in sales price would generally be considered.  The production cycle and credit and collection policies of the firm will have an impact on Working Capital requirements.  Therefore, they should be given due weightage in projecting Working Capital requirements.\n\n<!-- image -->"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 6. OPERATING OR WORKING CAPITAL CYCLE\n\nA useful tool for managing working capital is the operating cycle.\n\nThe  operating  cycle  analyses  the  accounts  receivable,  inventory  and  accounts payable cycles in terms of number of days.  For example:\n\n- Accounts receivables are analyzed by the average number of days it takes to collect an account.\n- Inventory is analyzed by the average number of days it takes to turn over the sale  of  a  product  (from  the  point  it  comes  in  the  store  to  the  point  it  is converted to cash or an account receivable).\n- Accounts payables are analyzed by the average number of days it takes to pay a supplier invoice."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Operating/Working Capital Cycle Definition\n\nWorking Capital cycle indicates the length of time between a company's paying for materials, entering into stock and receiving the cash from sales of finished goods. It can be determined by adding the number of days required for each stage in the\n\na\n\ncycle.  For example, a company holds raw materials on an average for 60 days, it gets  credit  from  the  supplier  for  15  days,  production  process  needs  15  days, finished goods are held for 30 days and 30 days credit is extended to debtors.  The total of all these, 120 days, i.e., 60 -15 + 15 + 30 + 30 days is the total working capital cycle.\n\n<!-- image -->\n\nMost businesses cannot finance the  operating cycle (accounts receivable days + inventory  days)  with  accounts  payable  financing  alone.    Consequently,  working capital  financing  is  needed.  This  shortfall  is  typically  covered  by  the  net  profits generated internally or by externally borrowed funds or by a combination of the two.\n\nThe faster a business expands the more cash it will need for working capital and investment.  The cheapest and best sources of cash exist as working capital right within the business. Good management of working capital will generate cash which will help improve profits and reduce risks.  Bear in mind that the cost of providing credit to customers and holding stocks can represent a substantial proportion of a firm's total profits.\n\nEach component of working capital (namely inventory, receivables and payables) has two dimensions Time and Money. When it comes to managing working capital then time is money . If you can get money to move faster around the cycle (e.g. collect amount due from debtors more quickly) or reduce the amount of money tied up (e.g. reduce inventory levels relative to sales), the business will generate more cash or it will need to borrow less money to fund working capital.  Similarly, if  you  can  negotiate  improved  terms  with  suppliers  e.g.  get  longer  credit  or  an"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Where,\n\nR  =  Raw material storage period\n\nW =  Work-in-progress inventory *  holding period\n\nF  =   Finished goods storage period\n\nD =   Receivables (Debtors) collection period\n\nC =   Credit period allowed by suppliers (Creditors)\n\n*  work in progress inventory may also be termed as works cost."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## MANAGEMENT OF WORKING CAPITAL\n\na\n\nincreased credit limit; you are effectively creating free finance to help fund future sales.\n\n| If you\u2026\u2026\u2026\u2026\u2026\u2026                                                       | Then \u2026\u2026\u2026\u2026\u2026\u2026\u2026.                     |\n|--------------------------------------------------------------------|-----------------------------------|\n| Collect receivables (debtors) faster                               | You release cash from the cycle   |\n| Collect receivables (debtors) slower                               | Your receivables soak up cash.    |\n| Get better credit (in terms of duration or amount) from suppliers. | You increase your cash resources. |\n| Shift inventory (stocks) faster                                    | You free up cash.                 |\n| Move inventory (stocks) slower                                     | You consume more cash.            |\n\nThe determination of operating capital cycle helps in the forecasting, controlling and management of working capital.  The length of operating cycle is the indicator of  performance  of  management.    The  net  operating  cycle  represents  the  time interval for which the firm has to negotiate for Working Capital from its lenders.  It enables  to  determine  accurately  the  amount  of  working  capital  needed  for  the continuous operation of business activities.\n\nThe duration of working capital cycle may vary depending on the nature of the business.\n\nIn the form of an equation, the operating cycle process can be expressed as follows:\n\n<!-- formula-not-decoded -->\n\nAlso,"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## The  various  components  of  Operating  Cycle  may  be  calculated  as  shown below:\n\n| (1)   | Raw Material Storage Period                    | Average stockof raw material AverageCostof Raw Material Consumption perday =   |\n|-------|------------------------------------------------|--------------------------------------------------------------------------------|\n| (2)   | Work-in-Progress inventory holding period      | AverageWork-in-progressinventory = Average Costof Production perday            |\n| (3)   | Finished Goods storage period                  | Average stock of finished goods = Average Costof Goods Sold perday             |\n| (4)   | Receivables (Debtors) collection period        | Average Receivables = Average Credit Sales perday                              |\n| (5)   | Credit period allowed by suppliers (Creditors) | Average Payables = Average Credit Purchases perday                             |"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 6.1  Working Capital Based on Operating Cycle\n\nOne of the methods for forecasting working capital requirement is based on the concept of operating cycle.  The calculation of operating cycle and the formula for estimating  working  capital  on  its  basis  has  been  demonstrated  with  the  help  of following illustration:"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## MANAGEMENT OF WORKING CAPITAL\n\na\n\n( ` )\n\n|        |                                                 | ( ` )    |\n|--------|-------------------------------------------------|----------|\n| (i)    | Raw material inventory consumed during the year | 6,00,000 |\n| (ii)   | Average stock of raw material                   | 50,000   |\n| (iii)  | Cost of Production for the year                 | 5,00,000 |\n| (iv)   | Average work-in-progress inventory              | 30,000   |\n| (v)    | Cost of goods sold during the year              | 8,00,000 |\n| (vi)   | Average finished goods stock held               | 40,000   |\n| (vii)  | Average collection period from debtors          | 45 days  |\n| (viii) | Average credit period availed                   | 30 days  |\n| (ix)   | No. of days in a year                           | 360 days |"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## (a) Calculation of Net Operating Cycle period of XYZ Ltd.\n\nRaw Material storage period (R)=\n\nAverage stockof raw material\n\nAverage Cost of  Raw Material Consumption perday\n\n<!-- formula-not-decoded -->\n\n<!-- formula-not-decoded -->\n\nWork-in-progress inventory holding period (W)\n\n<!-- formula-not-decoded -->\n\n<!-- formula-not-decoded -->\n\na"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 6.2  Estimation  of  amount  of  Different  Components  of Current Assets and Current Liabilities\n\nThe  various  constituents  of  current  assets  and  current  liabilities  have  a  direct bearing on the computation of working capital and the operating cycle. The holding period of various constituents of Current Assets and Current Liabilities cycle may either contract or expand the net operating cycle period.\n\nShorter the operating cycle period, lower will be the requirement of working capital and vice-versa."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Estimation of Current Assets\n\nThe estimates of various components of gross working capital or current assets may be made as follows:\n\n- (i) Raw  Materials  Inventory: The  funds  to  be  invested  in  raw  materials inventory may be estimated on the basis of production budget, the estimated cost per  unit  and  average  holding  period  of  raw  material  inventory  by  using  the following formula:"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## MANAGEMENT OF WORKING CAPITAL\n\na\n\nEstimated Production (units) Estimated cost per unit x Average raw material storage period 12months/365days* x\n\n- (ii) Work-in-Progress Inventory: The funds to be invested in work-in-progress can be estimated by the following formula:\n\nx Estimated Production(units) Estimated WIP cost per unit x Average WIP holding  period 12months/365days*\n\n- (iii) Finished Goods: The funds to be invested in finished goods inventory can be estimated with the help of following formula:\n\nEstimated Production(units) 12months /365days* x Estimated cost of production per unit x Average finished goods storage period\n\n- (iv) Receivables (Debtors): Funds to be invested in trade receivables (debtors) may be estimated with the help of following formula:\n\n```\nEstimated Credit sales (units)\n```\n\n```\n12months /365days * x Estimated cost of sales (Excl. Dep.) per unit x Average receivable collection period.\n```\n\nNote  that  only  cash  cost  is  considered  for  debtors  and  finished  goods elements  (as  the  sales  to  debtors  include  cost  &amp;  profit  whereas  the  funds required for working capital purposes doesn't need to include profit). Further, non-cash expense like depreciation is also excluded.\n\n- (v) Cash and Cash equivalents: Minimum desired Cash and Bank balance to be maintained by the firm has to be added in the current assets for the computation of working capital."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Estimation of Current Liabilities\n\nCurrent  liabilities  are  deducted  from  the  current  assets  to  get  working  capital. Hence, the amount of working capital is lowered to the extent of current liabilities (other than bank credit) arising in the normal course of business. The important current liabilities  like  trade payables, wages and overheads can be estimated as follows:\n\n- (i) Trade Payables: Trade payable can be estimated on the basis of material purchase budget and the credit purchase by using following formula:\n\na"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## FINANCIAL MANAGEMENT\n\nEstimated credit purchase 12months/365days* \u00d7 Credit period allowed by suppliers\n\n- (ii) Direct Wages: It is estimated with the help of direct wages budget by using following formula:\n\nEstimated labour hours\u00d7wages rate perhour 12months/365days* \u00d7 Average time lag in payment of wages\n\n- (iii) Overheads  (other  than  depreciation  and  amortization): It  may  be estimated with the help of following formula:\n\nEstimated Overheads 12months/360days* \u00d7 Average time lag in payment of overheads\n\n- *Number of days in a year may be taken as 365 or 360 days."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Estimation of Working Capital Requirements\n\n|     |                       | Amount (`)   | Amount (`)   | Amount (`)   |\n|-----|-----------------------|--------------|--------------|--------------|\n| I.  | Current Assets:       |              |              |              |\n|     | Inventories:          |              |              |              |\n|     | - Raw Materials       | ---          |              |              |\n|     | - Work-in-process     | ---          |              |              |\n|     | - Finished goods      | ---          | ---          |              |\n|     | Receivables:          |              |              |              |\n|     | - Trade debtors       | ---          |              |              |\n|     | - Bills               | ---          | ---          |              |\n|     | Prepaid Expenses      |              | ---          |              |\n|     | Minimum Cash Balance  |              | ---          |              |\n|     | Gross Working Capital |              | ---          | ---          |\n| II. | Current Liabilities:  |              |              |              |\n|     | Trade Payables        |              | ---          |              |"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## MANAGEMENT OF WORKING CAPITAL\n\na\n\n|      | Bills Payables                                             | ---   |     |\n|------|------------------------------------------------------------|-------|-----|\n|      | Wages Payables                                             | ---   |     |\n|      | Payables for overheads                                     | ---   | --- |\n| III. | Excess of Current Assets over Current Liabilities [I - II] |       | --- |\n| IV.  | Safety Margin                                              |       | --- |\n| V.   | Net Working Capital [III + IV]                             |       | --- |\n\nThe following illustration shows the process of working capital estimation:"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## ILLUSTRATION 3\n\nOn 1 st  January, the Managing Director of Naureen Ltd. wishes to know the amount of  working  capital  that  will  be  required  during  the  year.    From  the  following information, PREPARE the working capital requirements forecast.\n\nProduction during the previous year was 60,000 units.  It is planned that this level of activity would be maintained during the present year.\n\nThe expected ratios of the cost to selling prices are Raw materials 60%, Direct wages 10% and Overheads 20%.\n\nRaw materials are expected to remain in store for an average of 2 months before issue to production.\n\nEach unit is expected to be in process for one month, the raw materials being fed into the pipeline immediately and the labour and overhead costs accruing evenly during the month.\n\nFinished  goods  will  stay  in  the  warehouse  awaiting  dispatch  to  customers  for approximately 3 months.\n\nCredit allowed by creditors is 2 months from the date of delivery of raw material. Credit allowed to debtors is 3 months from the date of dispatch.\n\nSelling price is ` 5 per unit.\n\nThere is a regular production and sales cycle.\n\nWages and overheads are paid on the 1 st of each month for the previous month.\n\nThe company normally keeps cash in hand to the extent of ` 20,000."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Working Notes:\n\n1. Raw material inventory: The cost of materials for the whole year is 60% of the Sales value.\n\nHence it is 60,000 units \u00d7 ` 5 \u00d7 ` 60 = 1,80,000 100 .  The monthly consumption of raw material would be ` 15,000.  Raw material requirements would be for two months; hence raw materials in stock would be ` 30,000.\n\n2. Work-in-process: (Students  may give special attention to this point).   It is stated  that  each  unit  of  production  is  expected  to  be  in  process  for  one month).\n3. Finished goods inventory: (3 month's cost of production)\n\n|     |                                                                                                                                                                                                                                                                                                                                                                                 | (`)    |\n|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|\n| (a) | Raw materials in work-in- process (being one month's raw material requirements)                                                                                                                                                                                                                                                                                                 | 15,000 |\n| (b) | Labour costs in work-in-process (It is stated that it accrues evenly during the month. Thus, on the first day of each month it would be zero and on the last day of month the work-in-process would include one month's labour costs. On an average therefore, it would be equivalent to \u00bd of the month's labour costs) \u00a7 ' \u00a8 \u00b8 \u00a9 \u00b9 ` \u00d70.5 month 12 10%of (60,000 month ) s \u00d7 5 | 1,250  |\n| (c) | Overheads (For\u00bd month as explained above) \u00a7 ' \u00a8 \u00b8 \u00a9 \u00b9 \u00d70.5 month 12 20%of (60,000 mon \u00d7 t 5 hs ) `                                                                                                                                                                                                                                                                              | 2,500  |\n|     | Total work-in-process                                                                                                                                                                                                                                                                                                                                                           | 18,750 |\n\n| Raw materials   | \u00a7 \u00a8 \u00a9 \u00d73 months 12 60%of (60,000 mo \u00d7 nths 5) `   | 45,000   |\n|-----------------|---------------------------------------------------|----------|\n\na\n\n`\n\n`\n\na\n\n| Labour \u00a7 ' \u00a8 \u00b8 \u00d73 months 12 10%of (60,000 mo \u00d7 nths 5)        | 7,500   |\n|---------------------------------------------------------------|---------|\n| Overheads \u00a7 ' \u00a8 \u00b8 \u00a9 \u00b9 \u00d73 months 12 20%of (60,000 mo \u00d7 nths 5) | 15,000  |\n| Total finished goods inventory                                | 67,500  |\n| Alternatively, (60,000 units x ` 5 x 90%) x 3/12              | 67,500  |\n\n4. Debtors: The total cost of sales = 2,70,000.\n\n<!-- formula-not-decoded -->\n\nWhere, Total Cost of Sales = RM + Wages + Overheads + Opening Finished goods inventory -Closing finished goods inventory.\n\n<!-- formula-not-decoded -->\n\n5. Creditors: Suppliers allow a two months' credit period.  Hence, the average amount of creditors would be two months consumption of raw materials i.e.\n\n<!-- formula-not-decoded -->\n\n`\n\n<!-- formula-not-decoded -->\n\n`\n\n<!-- formula-not-decoded -->\n\nHere  it  has  been  assumed  that  inventory  level  is  uniform  throughout  the  year, therefore opening inventory equals closing inventory."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Statement of Working Capital Required\n\n|                                                    | ( ` )   | ( ` )   |\n|----------------------------------------------------|---------|---------|\n| Current Assets or Gross Working Capital:           |         |         |\n| Raw materials inventory (Refer to working note 1)  | 30,000  |         |\n| Working - in-process (Refer to working note 2)     | 18,750  |         |\n| Finished goods inventory (Refer to working note 3) | 67,500  |         |\n\na\n\n| Debtors (Refer to working note 4)              | 67,500   |          |\n|------------------------------------------------|----------|----------|\n| Cash                                           | 20,000   | 2,03,750 |\n| Current Liabilities:                           |          |          |\n| Creditors (Refer to working note 5)            | 30,000   |          |\n| Direct wages payable (Refer to working note 6) | 2,500    |          |\n| Overheads payable (Refer to working note 7)    | 5,000    | (37,500) |\n| Estimated working capital requirements         |          | 1,66,250 |"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 6.3  Working  Capital  Requirement  Estimation  based  on Cash Cost\n\nWe have already seen that working capital is the difference between current assets and  current  liabilities.  To  estimate  requirements  of  working  capital,  we  have  to forecast the amount required for each item of current assets and current liabilities.\n\nIn  practice  another  approach  may  also  be  useful  in  estimating  working  capital requirements.  This approach is based on the fact that in the case of current assets, like  sundry  debtors  and  finished  goods,  etc.,  the  exact  amount  of  funds blocked is less than the amount of such current assets .  For example:\n\n- If we have sundry debtors worth ` 1 lakh and our cost of sales is ` 75,000, the actual amount of funds blocked in sundry debtors is ` 75,000 the cost of sundry debtors, the rest ( ` 25,000) is profit.\n- Again, some of the cost items also are non-cash costs; depreciation is a non-cash cost item. Suppose out of ` 75,000, ` 5,000 is depreciation; then it  is  obvious  that  the  actual  funds  blocked  in  terms  of  sundry  debtors totaling ` 1 lakh is only ` 70,000.  In other words, ` 70,000 is the amount of funds required to finance sundry debtors worth ` 1 lakh.\n- Similarly, in the case of finished goods which are valued at cost, non-cash costs may be excluded to work out the amount of funds blocked.\n\nMany experts, therefore, calculate the working capital requirements by working out the cash costs of finished goods and sundry debtors .  Under this approach, the debtors are calculated not as a percentage of sales value but as a percentage of cash costs.  Similarly, finished goods are valued according to cash costs."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## ILLUSTRATION 4\n\nThe following annual figures relate to XYZ Co.:\n\n|                                                                  | ( ` )     |\n|------------------------------------------------------------------|-----------|\n| Sales (at two months' credit)                                    | 36,00,000 |\n| Materials consumed (suppliers extend two months' credit)         | 9,00,000  |\n| Wages paid (1 month lag in payment)                              | 7,20,000  |\n| Cash manufacturing expenses (expenses are paid one month arrear) | 9,60,000  |\n| Administrative expenses (1 month lag in payment)                 | 2,40,000  |\n| Sales promotion expenses (paid quarterly in advance)             | 1,20,000  |\n\nThe company sells its products on gross profit of 25%. Depreciation is considered as a part of the cost of production.  It keeps one month's stock each of raw materials and finished goods, and a cash balance of ` 1,00,000.\n\nAssuming a 20% safety margin, COMPUTE the working capital requirements of the company on cash cost basis.  Ignore work-in-process."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Statement of Working Capital requirements (cash cost basis)\n\n|                                                                                    | ( ` )    | ( ` )   |\n|------------------------------------------------------------------------------------|----------|---------|\n| A. Current Assets                                                                  |          |         |\n| Inventory:                                                                         |          |         |\n| -Raw materials \u00a7 ' \u00a8 \u00b8 \u00a9 \u00b9 ` 9,00,000 \u00d71 month 12months                            | 75,000   |         |\n| -Finished Goods \u00a7 ' \u00a8 \u00b8 \u00a9 \u00b9 ` 25,80,000 \u00d71 month 12months                          | 2,15,000 |         |\n| Receivables (Debtors) \u00a7 ' \u00a8 \u00b8 \u00a9 \u00b9 ` 29,40,000 \u00d72months 12months                    | 4,90,000 |         |\n| Sales Promotion expenses paid in advance \u00a7 ' \u00a8 \u00b8 \u00a9 \u00b9 ` 1,20,000 \u00d73 months 12months | 30,000   |         |\n\na\n\na"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## FINANCIAL MANAGEMENT\n\n| Cash balance                                                                 | 1,00,000   | 9,10,000   |\n|------------------------------------------------------------------------------|------------|------------|\n| Gross Working Capital                                                        |            | 9,10,000   |\n| B. Current Liabilities:                                                      |            |            |\n| Payables:                                                                    |            |            |\n| -Creditors for materials \uf0e6 \uf0f6 \uf0e7 \uf0f7 \uf0e8 \uf0f8 ` 9,00,000 \u00d72 month 12months            | 1,50,000   |            |\n| Wages outstanding \uf0e6 \uf0f6 \uf0e7 \uf0f7 \uf0e8 \uf0f8 ` 7,20,000 \u00d71 month 12months                   | 60,000     |            |\n| Manufacturing expenses outstanding \uf0e6 \uf0f6 \uf0e7 \uf0f7 \uf0e8 \uf0f8 ` 9,60,000 \u00d71 month 12months  | 80,000     |            |\n| Administrative expenses outstanding \uf0e6 \uf0f6 \uf0e7 \uf0f7 \uf0e8 \uf0f8 ` 2,40,000 \u00d71 month 12months | 20,000     | 3,10,000   |\n| Net working capital (A - B)                                                  |            | 6,00,000   |\n| Add : Safety margin @20%                                                     |            | 1,20,000   |\n| Total Working Capital requirements                                           |            | 7,20,000   |"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Working Notes:\n\n| (i)   | Computation of Annual Cash Cost of Production   | ( ` )     |\n|-------|-------------------------------------------------|-----------|\n|       | Material consumed                               | 9,00,000  |\n|       | Wages                                           | 7,20,000  |\n|       | Manufacturing expenses                          | 9,60,000  |\n|       | Total cash cost of production                   | 25,80,000 |\n| (ii)  | Computation of Annual Cash Cost of Sales:       | ( ` )     |\n|       | Total Cash cost of production as in (i) above   | 25,80,000 |\n|       | Administrative Expenses                         | 2,40,000  |\n|       | Sales promotion expenses                        | 1,20,000  |\n|       | Total cash cost of sales                        | 29,40,000 |\n\na"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 6.4  Effect  of  Double  Shift  Working  on  Working  Capital Requirements\n\nThe greatest economy in introducing double shift is the greater utilization of fixed assets. Although production increases, little or very marginal funds may be required for additional assets.\n\nBut increase in the number of hours of production has an effect on the working capital  requirements.  Let's  see  the impact  of  double  shift on  some  of  the components of working capital:-\n\n- It  is  obvious  that  in  double  shift  working,  an  increase  in  stocks  will  be required  as  the  production  rises.    However,  it  is  quite  possible  that  the increase  may  not  be  proportionate  to  the  rise  in  production  since  the minimum level of stocks may not be very much higher.  Thus, it is quite likely that the level of stocks may not be required to be doubled as the production goes up two-fold.\n- The amount of materials in process will not change due to double shift working  since  work  started  in  the  first  shift  will  be  completed  in  the second; hence, capital tied up in materials in process will be the same as with  single  shift  working.    As  such  the  cost  of  work-in-process  will  not change unless the second shift's workers are paid at a higher rate.\n- Also, additional requirements of materials &amp; other resources may result in some economies (for example better negotiation with vendors on account increased purchase of materials etc). Further all the fixed costs may not increase with additional shift."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## ILLUSTRATION 5\n\nSamreen Enterprises has been operating its manufacturing facilities till 31.3.2022 on a single shift working with the following cost structure:\n\n|                                    | Per unit ( ` )                    |\n|------------------------------------|-----------------------------------|\n| Cost of Materials                  | 6.00                              |\n| Wages (out of which 40% fixed)     | 5.00                              |\n| Overheads (out of which 80% fixed) | 5.00                              |\n| Profit                             | 2.00                              |\n| Selling Price                      | 18.00                             |\n| Sales during 2020-21 - ` 4,32,000  | Sales during 2020-21 - ` 4,32,000 |\n\na\n\nAs at 31.3.2022 the company held:\n\n|                                         | ( ` )    |\n|-----------------------------------------|----------|\n| Stock of raw materials (at cost)        | 36,000   |\n| Work-in-progress (valued at prime cost) | 22,000   |\n| Finished goods (valued at total cost)   | 72,000   |\n| Sundry debtors                          | 1,08,000 |\n\nIn view of increased market demand, it is proposed to double production by working an extra shift.  It is expected that a 10% discount will be available from suppliers of raw materials in view of increased volume of business.  Selling price will remain the same.  The credit period allowed to customers will remain unaltered.  Credit availed of from suppliers will continue to remain at the present level i.e., 2 months.  Lag in payment of wages and expenses will continue to remain half a month.\n\nYou  are  required  to  PREPARE  the  additional  working  capital  requirements,  if  the policy to increase output is implemented."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## SOLUTION\n\nThis question can be solved using two approaches:\n\n- (i) To assess the impact of double shift for long term as a matter of production policy.\n- (ii) To assess the impact of double shift to mitigate the immediate demand for next year only.\n\nThe first approach is more appropriate and fulfilling the requirement of the question."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## (i) Assessment  of  impact  of  double  shift  for  long  term  as  a  matter  of production policy:\n\nComparative Statement of Working Capital Requirement\n\n|                | Single Shift (24,000)   | Single Shift (24,000)   | Single Shift (24,000)   | Double Shift (48,000)   | Double Shift (48,000)   | Double Shift (48,000)   |\n|----------------|-------------------------|-------------------------|-------------------------|-------------------------|-------------------------|-------------------------|\n|                | Unit                    | Rate ( ` )              | Amount ( ` )            | Unit                    | Rate ( ` )              | Amount ( ` )            |\n| Current Assets |                         |                         |                         |                         |                         |                         |\n| Inventories:   |                         |                         |                         |                         |                         |                         |\n| Raw Materials  | 6,000                   | 6.00                    | 36,000                  | 12,000                  | 5.40                    | 64,800                  |\n\na\n\n| Work-in-Progress               | 2,000   | 11.00   | 22,000   | 2,000   | 9.40   | 18,800   |\n|--------------------------------|---------|---------|----------|---------|--------|----------|\n| Finished Goods                 | 4,500   | 16.00   | 72,000   | 9,000   | 12.40  | 1,11,600 |\n| Sundry Debtors                 | 6,000   | 16.00   | 96,000   | 12,000  | 12.40  | 1,48,800 |\n| Total Current Assets: (A)      |         |         | 2,26,000 |         |        | 3,44,000 |\n| Current Liabilities            |         |         |          |         |        |          |\n| Creditors for Materials        | 4,000   | 6.00    | 24,000   | 8,000   | 5.40   | 43,200   |\n| Creditors for Wages            | 1,000   | 5.00    | 5,000    | 2,000   | 4.00   | 8,000    |\n| Creditors for Expenses         | 1,000   | 5.00    | 5,000    | 2,000   | 3.00   | 6,000    |\n| Total Current Liabilities: (B) |         |         | 34,000   |         |        | 57,200   |\n| Working Capital: (A) - (B)     |         |         | 1,92,000 |         |        | 2,86,800 |\n\nAdditional Working Capital requirement = ` 2,86,800 -` 1,92,000 = ` 94,800"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Workings:\n\n- (1) Statement of cost at single shift and double shift working\n\n|                      | 24,000 units   | 24,000 units   | 48,000 Units   | 48,000 Units   |\n|----------------------|----------------|----------------|----------------|----------------|\n|                      | Per unit ( ` ) | Total ( ` )    | Per unit ( ` ) | Total ( ` )    |\n| Raw materials        | 6.00           | 1,44,000       | 5.40           | 2,59,200       |\n| 1. Wages - Variable  | 3.00           | 72,000         | 3.00           | 1,44,000       |\n| Fixed                | 2.00           | 48,000         | 1.00           | 48,000         |\n| Overheads - Variable | 1.00           | 24,000         | 1.00           | 48,000         |\n| Fixed                | 4.00           | 96,000         | 2.00           | 96,000         |\n| Total cost           | 16.00          | 3,84,000       | 12.40          | 5,95,200       |\n| Profit               | 2.00           | 48,000         | 5.60           | 2,68,800       |\n|                      | 18.00          | 4,32,000       | 18.00          | 8,64,000       |\n\na"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## FINANCIAL MANAGEMENT\n\n- (2) Sales in units 2020-21= Sales Unit selling price 4,32,000 = =24,000 units 18 ` `\n- (3) Stock of Raw Materials in units on 31.3.2021\n\n<!-- formula-not-decoded -->\n\n- (4) Stock of work-in-progress in units on 31.3.2021\n\n<!-- formula-not-decoded -->\n\n- (5) Stock of finished goods in units 2020-21\n\n`\n\n<!-- formula-not-decoded -->\n\n- (ii) Assessment  of  the  impact  of  double  shift  to  mitigate  the  immediate demand for next year only &amp; not as part of policy implementation.\n\nIn this approach, working capital shall be computed as if we are calculating the same for the next / second year with double production. Whereas, in the first approach to implement double-shift as part of policy implementation, we calculated comparative analysis of working capital requirement for single &amp; double shift within the same year."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Workings:\n\n- (6) Calculation of no. of units to be sold:\n- (7) Calculation of Material to be consumed and materials to be purchased in units:\n\n| No. of units to be Produced           | 48,000   |\n|---------------------------------------|----------|\n| Add: Opening stock of finished goods  | 4,500    |\n| Less: Closing stock of finished goods | (9,000)  |\n| No. of units to be Sold               | 43,500   |\n\n| No. of units Produced                 | 48,000   |\n|---------------------------------------|----------|\n| Add: Closing stock of WIP             | 2,000    |\n| Less: Opening stock of WIP            | (2,000)  |\n| Raw Materials to be consumed in units | 48,000   |"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Comparative Statement of Working Capital Requirement\n\n|                                | Single Shift (Current Year - 24,000 units)   | Single Shift (Current Year - 24,000 units)   | Single Shift (Current Year - 24,000 units)   | Double Shift (Next Year - 48,000 units)   | Double Shift (Next Year - 48,000 units)   | Double Shift (Next Year - 48,000 units)   |\n|--------------------------------|----------------------------------------------|----------------------------------------------|----------------------------------------------|-------------------------------------------|-------------------------------------------|-------------------------------------------|\n|                                | Unit                                         | Rate ( ` )                                   | Amount ( ` )                                 | Unit                                      | Rate ( ` )                                | Amount ( ` )                              |\n| Current Assets                 |                                              |                                              |                                              |                                           |                                           |                                           |\n| Inventories:                   |                                              |                                              |                                              |                                           |                                           |                                           |\n| Raw Materials                  | 6,000                                        | 6.00                                         | 36,000                                       | 12,000                                    | 5.40                                      | 64,800                                    |\n| Work-in-Progress               | 2,000                                        | 11.00                                        | 22,000                                       | 2,000                                     | 9.40                                      | 18,800                                    |\n| Finished Goods                 | 4,500                                        | 16.00                                        | 72,000                                       | 9,000                                     | 12.40                                     | 1,11,600                                  |\n| Sundry Debtors                 | 6,000                                        | 16.00                                        | 96,000                                       | 12,000                                    | 12.40                                     | 1,48,800                                  |\n| Total Current Assets: (A)      |                                              |                                              | 2,26,000                                     |                                           |                                           | 3,44,000                                  |\n| Current Liabilities            |                                              |                                              |                                              |                                           |                                           |                                           |\n| Creditors for Materials        | 4,000                                        | 6.00                                         | 24,000                                       | 9,000                                     | 5.40                                      | 48,600                                    |\n| Creditors for Wages            | 1,000                                        | 5.00                                         | 5,000                                        | 2,000                                     | 4.00                                      | 8,000                                     |\n| Creditors for Expenses         | 1,000                                        | 5.00                                         | 5,000                                        | 2,000                                     | 3.00                                      | 6,000                                     |\n| Total Current Liabilities: (B) |                                              |                                              | 34,000                                       |                                           |                                           | 62,600                                    |\n| Working Capital: (A) - (B)     |                                              |                                              | 1,92,000                                     |                                           |                                           | 2,81,400                                  |\n\nAdditional Working Capital requirement = ` 2,81,400 -` 1,92,000 = ` 89,400\n\na"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_1_Introduction.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Notes:\n\n- (i) The quantity of material in process will not change due to double shift working since  work  started  in  the  first  shift  will  be  completed  in  the second shift.\n- (ii) It is given in the question that the WIP is valued at prime cost hence, it is  assumed that the WIP is 100% complete in respect of material and labour.\n- (iii) In absence of any information on proportion of credit sales to total sales, debtors quantity has been doubled for double shift. Hence, the units have been taken as 12,000 only.\n- (iv) It is assumed that all purchases are on credit.\n- (v) The valuation of work-in-progress based on prime cost (i.e. material &amp; labor) as per the policy of the company is as under.\n\n|                  |   Single shift ( ` ) |   Double shift ( ` ) |\n|------------------|----------------------|----------------------|\n| Materials        |                 6.00 |                 5.40 |\n| Wages - Variable |                 3.00 |                 3.00 |\n| Fixed            |                 2.00 |                 1.00 |\n|                  |                11.00 |                 9.40 |\n\na"}]

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+[{"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 7. TREASURY MANAGEMENT: MEANING\n\nIn the wake  of the competitive business  environment resulting from the liberalization of the economy, there is a pressure to manage cash scientifically.  The demand for funds for expansions coupled with high interest rates, foreign exchange volatility  and  the  growing  volume  of  financial  transactions  have  necessitated efficient management of money.\n\nTreasury management encompasses planning, organizing &amp; controlling the funds &amp; working capital of an enterprise in order to ensure best use of funds, maintain liquidity, reduce overall cost of funds and mitigating operational &amp; financial risk. It involves the corporate handling of all financial matters, the generation of external and internal funds for business, the management of currencies and cash flows and the complex, strategies, policies and procedures of corporate finance.\n\nThe treasury management mainly deals with:-\n\n- Working capital management; and\n- Financial risk management (It includes forex and interest rate management).\n\nThe key goals of treasury management are:-\n\n- Maximize the return on the available cash;\n- Minimize interest cost on borrowings;\n- Mobilise  as  much  cash  as  possible  for  corporate  ventures  for  maximum returns; and\n- Effective  dealing  in  forex,  money  and  commodity  markets  to  reduce  risks arising because of fluctuating exchange rates, interest rates and prices which can in turn affect the profitability of the organization.\n\na\n\n<!-- image -->\n\na"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 8. FUNCTIONS OF TREASURY DEPARTMENT\n\nThe treasury department have evolved in importance over number of years from being responsible for only cash handling issues to technical areas revolving around hedging forex risks, composition of capital structure etc. The fundamental tasks for which treasury department of any enterprise is responsible are :-\n\n1. Cash Management: It involves efficient cash collection process and managing payment of cash both inside the organisation and to third parties.\n\nThere may be complete centralization within a group treasury or the treasury may simply advise subsidiaries and divisions on policy matter viz., collection/payment periods, discounts, etc.\n\nTreasury will also manage  surplus funds in an investment portfolio. Investment policy will consider future needs for liquid funds and acceptable levels of risk as determined by company policy.\n\n2. Currency  Management: The  treasury  department  manages  the  foreign currency  risk  exposure  of  the  company.  In  a  large  multinational  company (MNC) the first step will usually be to set off intra-group indebtedness.  The use  of  matching  receipts  and  payments  in  the  same  currency  will  save transaction  costs  and  also  will  save  the  organization  from  any  unfavorable exchange movements.  Accordingly, Treasury might advise on the currency to be used when invoicing overseas sales.\n\nThe  treasury  will  manage  any  net  exchange  exposures  in  accordance  with company policy.  If risks are to be minimized then forward contracts can be used either to buy or sell currency forward.\n\n3. Fund  Management: Treasury  department  is  responsible  for  planning  and sourcing the company's short, medium and long -term cash needs. They also facilitate  temporary  investment  of  surplus  funds  by  mapping  the  time  gap between funds inflow and outflow. Treasury department will also participate in the decision on capital structure and forecast future interest and foreign currency rates.\n4. Banking: It is important that a company maintains a good relationship with its bankers.  Treasury department carry out negotiations with bankers with respect to interest rates, foreign exchange rates etc. and act as the initial point of contact with them.  Short-term finance can come in the form of bank loans or through the sale of commercial paper in the money market.\n\na\n\n5. Corporate Finance: Treasury department is involved with both acquisition and divestment  activities within the group. In addition, it will often  have responsibility for investor relations.  The latter activity has assumed increased importance in markets where share-price performance is regarded as crucial and may affect the company's ability to undertake acquisition activity or, if the price falls drastically, render it vulnerable to a hostile bid.\n\n<!-- image -->"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 9. MANAGEMENT OF CASH\n\nManagement  of  cash  is  an  important  function  of  the  finance  manager.    It  is concerned with the managing of:\n\n- (i) Cash flows into and out of the firm;\n- (ii) Cash flows within the firm; and\n- (iii) Cash  balances  held  by  the  firm  at  a  point  of  time  by  financing  deficit  or investing surplus cash.\n\nThe main objectives of cash management for a business are:-\n\n- Provide adequate cash to each of its units as per requirements;\n- No funds are blocked in idle cash; and\n- The surplus cash (if any) should be invested in order to maximize returns for the business.\n\nA  cash  management  scheme  therefore,  is  a  delicate  balance  between  the  twin objectives of liquidity and costs."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 9.1  The Need for Cash\n\nThe following are three basic considerations in determining the amount of cash or liquidity as have been outlined by Lord Keynes, a British Economist:\n\n- Transaction need: Cash facilitates the meeting of the day-to-day expenses and other debt payments.  Normally, inflows of cash from operations should be sufficient  for  this  purpose.    But  sometimes  this  inflow  may  be  temporarily blocked.  In such cases, it is only the reserve cash balance that can enable the firm to make its payments in time.\n\na\n\n- Speculative needs: Cash may be held in order to take advantage of profitable opportunities that may present themselves and which may be lost for want of ready cash/settlement.\n- Precautionary needs: Cash may be held to act as for providing safety against unexpected events.  Safety as is explained by the saying that a man has only three friends an old wife, an old dog and money at bank."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 9.2  Cash Planning\n\nCash Planning is a technique to plan and control the use of cash.  This protects the financial conditions of the firm by developing a projected cash statement from a forecast of expected cash inflows and outflows for a given period.  This may be done  periodically  either  on  daily,  weekly  or  monthly  basis.    The  period  and frequency  of  cash  planning  generally  depends  upon  the  size  of  the  firm  and philosophy of the management.  As firms grows and business operations become complex, cash planning becomes inevitable for continuing success.\n\nThe very first step in this direction is to estimate the requirement of cash.  For this purpose, cash flow statements and cash budget are required to be prepared.  The technique of preparing cash flow and funds flow statements have been discussed in Accounting paper at Intermediate level of CA course.  The preparation of cash budget has however, been demonstrated here."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 9.3  Cash Budget\n\nCash Budget is the most significant device to plan for and control cash receipts and payments.  This represents cash requirements of business during the budget period.\n\nThe various purposes of cash budgets are:-\n\n- Coordinate the timings of cash needs. It identifies the period(s) when there might either be a shortage of cash or an abnormally large cash requirement;\n- It also helps to pinpoint period(s) when there is likely to be excess cash;\n- It enables firm which has sufficient cash to take advantage like cash discounts on its accounts payable; and\n- Lastly it helps to plan/arrange adequately needed funds (avoiding excess/shortage of cash) on favorable terms.\n\na\n\nOn  the  basis  of  cash  budget,  the  firm  can  decide  to  invest  surplus  cash  in marketable securities and earn profits. On the contrary, any shortages can also be managed by making overdraft or credit arrangements with banks."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Main Components of Cash Budget\n\nPreparation of cash budget involves the following steps:-\n\n- (a) Selection of the period of time to be covered by the budget. It also defines the planning horizon.\n- (b) Selection  of  factors  that  have  a  bearing  on  cash  flows.  The  factors  that generate cash flows are generally divided into following two categories:-\n- (i) Operating (cash flows generated by operations of the firm); and\n- (ii) Financial (cash flows generated by financial activities of the firm).\n\nThe following figure highlights the cash surplus and cash shortage position over the period of cash budget for preplanning to take corrective and necessary steps.\n\n<!-- image -->"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 10.  METHODS OF CASH FLOW BUDGETING\n\nA cash budget can be prepared in the following ways:\n\n1. Receipts and Payments Method: In this method all the expected receipts and payments for budget  period are considered.    All  the  cash  inflow  and outflow of all functional budgets including capital expenditure budgets are considered.  Accruals and adjustments in accounts will not affect the cash\n\na\n\nflow budget.  Anticipated cash inflow is added to the opening balance of cash and all cash payments are deducted from this to arrive at the closing balance of cash.  This method is commonly used in business organizations.\n\n2. Adjusted  Income  Method: In  this  method  the  annual  cash  flows  are calculated  by  adjusting  the  sales  revenue  and  cost  figures  for  delays  in receipts  and  payments  (change  in  debtors  and  creditors)  and  eliminating non-cash items such as depreciation.\n3. Adjusted  Balance  Sheet  Method: In  this  method,  the  budgeted  balance sheet is predicted by expressing each type of asset (except cash &amp; bank) and short-term liabilities as percentage of the expected sales.  The profit is also calculated as a percentage of sales, so that the increase in o wner's equity can be forecasted.  Known adjustments, may be made to long-term liabilities and the balance sheet will then show if additional finance is needed (if budgeted assets exceed budgeted liabilities) or if there will be a positive cash balance (if budgeted liabilities exceed budgeted assets).\n\nIt  is  important  to  note  that  the  capital  budget  will  also  be  considered  in  the preparation of cash flow budget because the annual budget may disclose a need for new capital investments and also, the costs and revenues of any new projects coming on stream will need to be incorporated in the short-term budgets.\n\nThe Cash Budget can be prepared for short period or for long period."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 10.1  Cash budget for short period\n\nPreparation of cash budget month by month would require the following estimates:\n\n- (a) As regards receipts:\n1. Receipts from debtors;\n2. Cash Sales; and\n3. Any other source of receipts of cash (say, dividend from a subsidiary company)\n- (b) As regards payments:\n1. Payments to be made for purchases;"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## MANAGEMENT OF WORKING CAPITAL\n\n2. Payments to be made for expenses;\n3. Payments that are made periodically but not every month;\n3. (i) Debenture interest;\n4. (ii) Income tax paid in advance;\n5. (iii) Sales tax or GST etc.\n4. Special  payments  to  be  made  in  a  particular  month,  for  example, dividends to shareholders, redemption of debentures, repayments of loan, payment of assets acquired, etc."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Period\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\\_\n\n|           |                                                | Month 1   | Month 2   | Month 3   | Month 12   |\n|-----------|------------------------------------------------|-----------|-----------|-----------|------------|\n| Receipts: | Receipts:                                      |           |           |           |            |\n| 1.        | Opening balance                                |           |           |           |            |\n| 2.        | Collection from debtors                        |           |           |           |            |\n| 3.        | Cash sales                                     |           |           |           |            |\n| 4.        | Loans from banks                               |           |           |           |            |\n| 5.        | Proceeds from issue of shares, debentures etc. |           |           |           |            |\n| 6.        | Miscellaneous receipts                         |           |           |           |            |\n| 7.        | Other items                                    |           |           |           |            |\n| Total     | Total                                          |           |           |           |            |\n| Payments: | Payments:                                      |           |           |           |            |\n| 1.        | Payments to creditors                          |           |           |           |            |\n| 2.        | Wages                                          |           |           |           |            |\n\n| 3.                          | Overheads (e.g. Factory Rent, Administration, Selling and Distribution Expenses)   |\n|-----------------------------|------------------------------------------------------------------------------------|\n| 4.                          | Interest                                                                           |\n| 5.                          | Dividend                                                                           |\n| 6.                          | Corporate tax                                                                      |\n| 7.                          | Capital expenditure                                                                |\n| 8.                          | Other items                                                                        |\n| Total                       | Total                                                                              |\n| Closing balance             | Closing balance                                                                    |\n| [Surplus (+)/Shortfall (-)] | [Surplus (+)/Shortfall (-)]                                                        |\n\nStudents  are  required  to  do  good  practice  in  preparing  the  cash  budgets.    The following illustration will show how short-term cash budgets can be prepared."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## ILLUSTRATION 6\n\nPREPARE monthly cash budget for six months beginning from April 2024 on the basis of the following information:\n\n- (i) Estimated monthly sales are as follows:\n- (ii) Wages and salaries are estimated to be payable as follows:-\n\n|          | `        |           | `        |\n|----------|----------|-----------|----------|\n| January  | 1,00,000 | June      | 80,000   |\n| February | 1,20,000 | July      | 1,00,000 |\n| March    | 1,40,000 | August    | 80,000   |\n| April    | 80,000   | September | 60,000   |\n| May      | 60,000   | October   | 1,00,000 |\n\n|       | `      |           | `      |\n|-------|--------|-----------|--------|\n| April | 9,000  | July      | 10,000 |\n| May   | 8,000  | August    | 9,000  |\n| June  | 10,000 | September | 9,000  |"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## MANAGEMENT OF WORKING CAPITAL\n\n- (iii) Of the sales, 80% is on credit and 20% for cash.  75% of the credit sales are collected within one month after sale and the balance in two months after sale. There are no bad debt losses.\n- (iv) Purchases amount to 80% of sales and are made on credit and paid for in the month preceding the sales.\n- (v) The firm has 10% debentures of ` 1,20,000.  Interest on these has to be paid quarterly in January, April and so on.\n- (vi) The firm is to make an advance payment of tax of ` 5,000 in July, 2024.\n- (vii) The firm had a cash balance of ` 20,000 on April 1, 2024, which is the minimum desired level of cash balance.  Any cash surplus/deficit above/below this level is made up by temporary  investments/liquidation  of  temporary  investments  or temporary  borrowings  at  the  end  of  each  month  (interest  on  these  to  be ignored)."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## (Amount in ` )\n\n|                                   | February   | March    | April    | May    | June   | July     | August   | September   |\n|-----------------------------------|------------|----------|----------|--------|--------|----------|----------|-------------|\n| Total sales                       | 1,20,000   | 1,40,000 | 80,000   | 60,000 | 80,000 | 1,00,000 | 80,000   | 60,000      |\n| Credit sales (80% of total sales) | 96,000     | 1,12,000 | 64,000   | 48,000 | 64,000 | 80,000   | 64,000   | 48,000      |\n| Collections:                      |            |          |          |        |        |          |          |             |\n| One month (after sales)           |            | 72,000   | 84,000   | 48,000 | 36,000 | 48,000   | 60,000   | 48,000      |\n| Two months (after sales)          |            |          | 24,000   | 28,000 | 16,000 | 12,000   | 16,000   | 20,000      |\n| Total collections                 |            |          | 1,08,000 | 76,000 | 52,000 | 60,000   | 76,000   | 68,000      |"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Monthly Cash Budget for Six months, April to September, 2024\n\n(Amount in ` )\n\n|                                                              | April    | May      | June     | July     | August   | September   |\n|--------------------------------------------------------------|----------|----------|----------|----------|----------|-------------|\n| Receipts:                                                    |          |          |          |          |          |             |\n| Opening balance                                              | 20,000   | 20,000   | 20,000   | 20,000   | 20,000   | 20,000      |\n| Cash sales                                                   | 16,000   | 12,000   | 16,000   | 20,000   | 16,000   | 12,000      |\n| Collection from debtors                                      | 1,08,000 | 76,000   | 52,000   | 60,000   | 76,000   | 68,000      |\n| Total cash available (A)                                     | 1,44,000 | 1,08,000 | 88,000   | 1,00,000 | 1,12,000 | 1,00,000    |\n| Payments:                                                    |          |          |          |          |          |             |\n| Purchases                                                    | 48,000   | 64,000   | 80,000   | 64,000   | 48,000   | 80,000      |\n| Wages & salaries                                             | 9,000    | 8,000    | 10,000   | 10,000   | 9,000    | 9,000       |\n| Interest on debentures                                       | 3,000    | ---      | ---      | 3,000    | ---      | ---         |\n| Tax payment                                                  | ---      | ---      | ---      | 5,000    | ---      | ---         |\n| Total payments (B)                                           | 60,000   | 72,000   | 90,000   | 82,000   | 57,000   | 89,000      |\n| Minimum cash balance desired                                 | 20,000   | 20,000   | 20,000   | 20,000   | 20,000   | 20,000      |\n| Total cash needed (C)                                        | 80,000   | 92,000   | 1,10,000 | 1,02,000 | 77,000   | 1,09,000    |\n| Surplus - deficit (A-C)                                      | 64,000   | 16,000   | (22,000) | (2,000)  | 35,000   | (9,000)     |\n| Investment/financing Temporary Investments                   | (64,000) | (16,000) | ----     |          | (35,000) | -----       |\n| Liquidation of temporary investments or temporary borrowings | ----     | ----     | 22,000   | 2,000    | ----     | 9,000       |\n| Total effect of investment/financing (D)                     | (64,000) | (16,000) | 22,000   | 2,000    | (35,000) | 9,000       |\n| Closing cash balance (A+D-B)                                 | 20,000   | 20,000   | 20,000   | 20,000   | 20,000   | 20,000      |"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## MANAGEMENT OF WORKING CAPITAL\n\n- (a) Month-wise cash budget on receipts and payments basis; and\n- (b) Statement of Sources and uses of funds for the three months period.\n\nIt  is  anticipated that the working capital &amp; other account balances at 1 st January, 2024 will be as follows:\n\n|                          | ` in '000   |\n|--------------------------|-------------|\n| Cash in hand and at bank | 545         |\n| Short term investments   | 300         |\n| Debtors                  | 2,570       |\n| Stock                    | 1,300       |\n| Trade creditors          | 2,110       |\n| Other creditors          | 200         |\n| Dividends payable        | 485         |\n| Tax due                  | 320         |\n| Plant                    | 800         |\n\n| Budgeted Profit Statement:                        | ` in '000   | ` in '000   | ` in '000   |\n|---------------------------------------------------|-------------|-------------|-------------|\n|                                                   | January     | February    | March       |\n| Sales                                             | 2,100       | 1,800       | 1,700       |\n| Cost of goods sold                                | 1,635       | 1,405       | 1,330       |\n| Gross Profit                                      | 465         | 395         | 370         |\n| Administrative, Selling and Distribution Expenses | 315         | 270         | 255         |\n| Net Profit before tax                             | 150         | 125         | 115         |\n\n| Budgeted balances at the end of each months   | ` in '000   | ` in '000   | ` in '000   |\n|-----------------------------------------------|-------------|-------------|-------------|\n|                                               | 31 st Jan.  | 28 th Feb.  | 31 st March |\n| Short term investments                        | 700         | ---         | 200         |\n| Debtors                                       | 2,600       | 2,500       | 2,350       |\n| Stock                                         | 1,200       | 1,100       | 1,000       |"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## FINANCIAL MANAGEMENT\n\n| Trade creditors              |   2,000 | 1,950   | 1,900   |\n|------------------------------|---------|---------|---------|\n| Other creditors              |     200 | 200     | 200     |\n| Dividends payable            |     485 | --      | --      |\n| Tax due                      |     320 | 320     | 320     |\n| Plant (depreciation ignored) |     800 | 1,600   | 1,550   |\n\nDepreciation amount to ` 60,000 is included in the budgeted expenditure for each month."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## WORKING\n\n|     |                                        | ` in '000   | ` in '000   | ` in '000   |\n|-----|----------------------------------------|-------------|-------------|-------------|\n|     |                                        | Jan.        | Feb.        | March       |\n| (1) | Payments to creditors:                 |             |             |             |\n|     | Cost of goods sold                     | 1,635       | 1,405       | 1,330       |\n|     | Add: Closing Stocks                    | 1,200       | 1,100       | 1,000       |\n|     |                                        | 2,835       | 2,505       | 2,330       |\n|     | Less: Opening Stocks                   | 1,300       | 1,200       | 1,100       |\n|     | Purchases                              | 1,535       | 1,305       | 1,230       |\n|     | Add: Trade Creditors, Opening balance  | 2,110       | 2,000       | 1,950       |\n|     |                                        | 3,645       | 3,305       | 3,180       |\n|     | Less: Trade Creditors, closing balance | 2,000       | 1,950       | 1,900       |\n|     | Payment                                | 1,645       | 1,355       | 1,280       |\n| (2) | Receipts from debtors:                 |             |             |             |\n|     | Debtors, Opening balances              | 2,570       | 2,600       | 2,500       |\n|     | Add : Sales                            | 2,100       | 1,800       | 1,700       |\n|     |                                        | 4,670       | 4,400       | 4,200       |\n|     | Less: Debtors, closing balance         | 2,600       | 2,500       | 2,350       |\n|     | Receipt                                | 2,070       | 1,900       | 1,850       |"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## (a) 3 months ending 31 st  March, 2024\n\n| ( ` in 000)                | ( ` in 000)   | ( ` in 000)    | ( ` in 000)   |\n|----------------------------|---------------|----------------|---------------|\n|                            | January, 2024 | February, 2024 | March, 2024   |\n| Opening cash balances      | 545           | 315            | 65            |\n| Add: Receipts:             |               |                |               |\n| From Debtors               | 2,070         | 1,900          | 1,850         |\n| Sale of Investments        | ---           | 700            | ----          |\n| Sale of Plant              | ---           | ---            | 50            |\n| Total (A)                  | 2,615         | 2,915          | 1,965         |\n| Deduct: Payments           |               |                |               |\n| Creditors                  | 1,645         | 1,355          | 1,280         |\n| Expenses                   | 255           | 210            | 195           |\n| Capital Expenditure        | ---           | 800            | ---           |\n| Payment of dividend        | ---           | 485            | ---           |\n| Purchase of investments    | 400           | ---            | 200           |\n| Total payments (B)         | 2,300         | 2,850          | 1,675         |\n| Closing cash balance (A-B) | 315           | 65             | 290           |"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## (b) Statement  of  Sources  and  uses  of  Funds  for  the  three  month  period ending 31 st  March, 2024\n\n|                          | ` '000   | ` '000   |\n|--------------------------|----------|----------|\n| Sources:                 |          |          |\n| Funds from operation:    |          |          |\n| Net profit (150+125+115) | 390      |          |\n| Add: Depreciation (60\u00d73) | 180      | 570      |\n| Sale of plant            |          | 50       |\n|                          |          | 620      |\n\n| Decrease in Working Capital (Refer Statement of changes in working capital)   | 665   |\n|-------------------------------------------------------------------------------|-------|\n| Total                                                                         | 1,285 |\n| Uses:                                                                         |       |\n| Purchase of plant                                                             | 800   |\n| Payment by dividends                                                          | 485   |\n| Total                                                                         | 1,285 |"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Statement of Changes in Working Capital\n\n|                          | January,24 ` ' 000   | March,24 ` ' 000   | Increase ` ' 000   | Decrease ` ' 000   |\n|--------------------------|----------------------|--------------------|--------------------|--------------------|\n| Current Assets           |                      |                    |                    |                    |\n| Cash in hand and at Bank | 545                  | 290                |                    | 255                |\n| Short term Investments   | 300                  | 200                |                    | 100                |\n| Debtors                  | 2,570                | 2,350              |                    | 220                |\n| Stock                    | 1,300                | 1,000              |                    | 300                |\n|                          | 4,715                | 3,840              |                    |                    |\n| Current Liabilities      |                      |                    |                    |                    |\n| Trade Creditors          | 2,110                | 1,900              | 210                | ---                |\n| Other Creditors          | 200                  | 200                | ---                | ---                |\n| Tax Due                  | 320                  | 320                | ---                | ---                |\n|                          | 2,630                | 2,420              |                    |                    |\n| Working Capital          | 2,085                | 1,420              |                    |                    |\n| Decrease                 | -                    | 665                | 665                |                    |\n|                          | 2,085                | 2,085              | 875                | 875                |"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## (ii) Add:\n\n- (a) Trading profit (before tax) expected to be earned;\n- (b) Depreciation and other development expenses incurred to be written off;\n- (c) Sale proceeds of assets;\n- (d) Proceeds of fresh issue of shares or debentures; and\n- (e) Reduction  in  working  capital  that  is  current  assets  (except  cash)  less current liabilities."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## (iii) Deduct:\n\n- (a) Dividends to be paid.\n- (b) Cost of assets to be purchased.\n- (c) Taxes to be paid.\n- (d) Debentures or preference shares to be redeemed.\n- (e) Increase  in  working  capital  that  is  current  assets  (except  cash)  less current liabilities."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Profit and Loss Account\n\n|                           | Year 1      | Year 2       |                  | Year 1      | Year 2       |\n|---------------------------|-------------|--------------|------------------|-------------|--------------|\n|                           | `           | `            |                  | `           | `            |\n| To Opening stock          | 80,00,000   | 1,00,00,000  | By Sales         | 8,00,00,000 | 10,00,00,000 |\n| To Raw materials          | 3,00,00,000 | 4,00,00,000  | By Closing stock | 1,00,00,000 | 1,50,00,000  |\n| To Stores                 | 1,00,00,000 | 1,20,00,000  | By Misc. Income  | 10,00,000   | 10,00,000    |\n| To Manufacturing Expenses | 1,00,00,000 | 1,60,00,000  |                  |             |              |\n| To Other Expenses         | 1,00,00,000 | 1,00,00,000  |                  |             |              |\n| To Depreciation           | 1,00,00,000 | 1,00,00,000  |                  |             |              |\n| To Net Profit             | 1,30,00,000 | 1,80,00,000  |                  | -           | -            |\n| To Net Profit             | 9,10,00,000 | 11,60,00,000 |                  | 9,10,00,000 | 11,60,00,000 |"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## MANAGEMENT OF WORKING CAPITAL\n\na\n\na\n\nSales are expected to be ` 12,00,00,000 in year 3.\n\nAs a result, other expenses will increase by ` 50,00,000 besides other charges.  Only raw materials are in stock.  Assume sales and purchases are in cash terms and the closing stock is expected to go up by the same amount as between year 1 and 2.  You may assume that no dividend is being paid.  The Company can use 75% of the cash generated  to  service  a  loan.    COMPUTE  how  much  cash  from  operations  will  be available in year 3 for the purpose?  Ignore income tax."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Projected Profit and Loss Account for the year 3\n\n|                       | Year 2 Actual ( ` in lakhs)   | Year 3 Projected ( ` in lakhs)   |                 | Year 2 Actual ( ` in lakhs)   | Year 3 Projected ( ` in lakhs)   |\n|-----------------------|-------------------------------|----------------------------------|-----------------|-------------------------------|----------------------------------|\n| To Materials consumed | 350                           | 420                              | By Sales        | 1,000                         | 1,200                            |\n| To Stores             | 120                           | 144                              | By Misc. Income | 10                            | 10                               |\n| To Mfg. Expenses      | 160                           | 192                              |                 |                               |                                  |\n| To Other expenses     | 100                           | 150                              |                 |                               |                                  |\n| To Depreciation       | 100                           | 100                              |                 |                               |                                  |\n| To Net profit         | 180                           | 204                              |                 |                               |                                  |\n|                       | 1,010                         | 1,210                            |                 | 1,010                         | 1,210                            |"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Cash Flow:\n\n|                                            |   ( ` in lakhs) |\n|--------------------------------------------|-----------------|\n| Profit                                     |             204 |\n| Add : Depreciation                         |             100 |\n|                                            |             304 |\n| Less : Cash required for increase in stock |              50 |\n| Net cash inflow                            |             254 |\n\nAvailable for servicing the loan: 75% of\n\n` 2,54,00,000 or ` 1,90,50,000"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Working Notes:\n\n- (i)\n- Material consumed in year 2: 35% of sales.\n\n<!-- formula-not-decoded -->\n\n- (ii) Stores are 12% of sales, as in year 2.\n- (iii) Manufacturing expenses are 16% of sales.\n\nNote: The above also shows how a projected profit and loss account is prepared."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 10.3 Managing Cash Collection and Disbursements\n\nHaving prepared the cash budget, the finance manager should ensure that there is not a significant deviation between projected cash flows and actual cash flows.\n\nTo achieve this cash management, efficiency will have to be brought in by proper control of cash collection and disbursement.\n\nThe twin objectives in managing the cash flows should be:-\n\n- Accelerate cash collections as much as possible; and\n- Decelerate or delay cash disbursements within permissible time frame.\n\nLet's discuss each of the two objectives individually."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 10.4 Accelerating Cash Collections\n\nDifferent Kinds of Float with reference to Management of Cash: First,  let's understand the time involved in the cash collection process. The term float is used to refer to the periods that affect cash as it moves through the different stages of the collection process.  Four kinds of float with reference to management of cash are:\n\n- Billing float: An invoice is the formal document that a seller prepares and sends to the purchaser as the payment request for goods sold or services provided. The time between the sale and the mailing of the invoice is known as billing float.\n- Mail float: This is the time when a cheque is being carried by post office, messenger service or other means of delivery.\n\na\n\na"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## FINANCIAL MANAGEMENT\n\n- Cheque processing float: This  is  the  time  required  for  the  seller  to  sort, record and deposit the cheque after it has been received by the company.\n- Banking processing float: This is the time from the deposit of the cheque to the crediting of funds in the sellers' account.\n\nThere are multiple ways in which a firm can attempt to reduce or eliminate any or all types of floats above. For instance:\n\n- \uf0a8 A firm can conserve cash and reduce its requirements for cash balances if it can  speed  up  its  cash  collections  by  issuing  invoices  quickly  (reducing  / eliminating billing float);\n- \uf0a8 By reducing  the time  lag  between a customer pays bill  and  the  cheque is collected (reducing / eliminating mail float);\n- \uf0a8 Making  funds  become  available  for  the  firm's  use  (reducing  /  eliminating processing floats).\n\nA  firm  can  also  use  decentralized  collection  system  known  as  concentration banking and lock box system to speed up cash collection and reduce float time.\n\n- (i) Concentration Banking: In concentration banking, the company establishes a number of strategic collection centers in different regions instead of a single collection center at the head office.  This system reduces the period between the time a customer mails in his remittances and the time when they become spendable  funds  with  the  company.    Payments  received  by  the  different collection  centers  are  deposited  with  their  respective  local  banks  which  in turn transfer all surplus funds to the concentration bank of head office.  The concentration bank with which the company has its major bank account is generally located at the headquarters. Concentration banking is  one important and popular way of reducing the size of the float.\n- (ii) Lock Box System: Another means to accelerate the flow of funds is a lock box  system.    While  concentration  banking,  remittances  are  received  by  a collection center and deposited in the bank after processing.  The purpose of lock box system is to eliminate the time between the receipts of remittances by the company and deposited in the bank. A lock box arrangement usually is on regional basis which a company chooses according to its billing patterns.\n\na\n\nUnder  this  arrangement,  the  company  rents  the  local  post-office  box  and authorizes its bank at each of the locations to pick up remittances in the boxes. Customers are billed with instructions to mail their remittances to the lock boxes. The bank picks up the mail several times a day and deposits the cheques in the company's account.  The cheques may be micro -filmed for record purposes and cleared for collection.  The company receives a deposit slip and lists all payments together  with  any  other  material  in  the  envelope.    This  procedure  frees  the company from handling and depositing the cheques.\n\nThe main advantage of lock box system is that cheques are deposited with the banks sooner and become collected funds sooner than if they were processed by the company prior to deposit.  In other words, lag between the time cheques are received by the company and the time they are actually deposited in the bank (i.e. cheque processing float) is eliminated.\n\nThe  main  drawback  of  lock  box  system  is  the  cost  of  its  operation.    The  bank provides a number of services in addition to usual clearing of cheques and requires compensation  for  them.    Since  the  cost  is  almost  directly  proportional  to  the number of cheques deposited.  Lock box arrangements are usually not profitable if the average remittance is small.  The appropriate rule for deciding whether or not to use a lock box system or for that matter, concentration banking, is simply to compare the added cost of the most efficient system with the marginal income that can be generated from the released funds.  If costs are less than income, the system is profitable and if the system is not profitable, it is not worth undertaking."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 10.5 Controlling Payments\n\nAn effective control over payments can also cause faster turnover of cash.  This is possible only by making payments on the due date, making excessive use of draft (bill of exchange) instead of cheques.\n\nAvailability of cash can be maximized by playing the float.  In this, a firm estimates accurately the time when the cheques issued will be presented for encashment and thus utilizes the float period to its advantage by issuing more cheques but having in the bank account only so much cash balance as will be sufficient to honour those cheques which are actually expected to be presented on a particular date.\n\na\n\nAlso, the company may make payment to its outstation suppliers by a cheque and send it through mail.  The delay in transit and collection of the cheque, will be used to increase the float."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## ILLUSTRATION 9\n\nPrachi Ltd is a manufacturing company producing and selling a range of cleaning products to wholesale customers. It has three suppliers and two customers. Prachi Ltd relies on its cleared funds forecast to manage its cash.\n\nYou are an accounting technician for the company and have been asked to prepare a cleared funds forecast for the period Saturday 9 August to Wednesday 13 August 20X2 inclusive. You have been provided with the following information:"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## (1) Receipts from customers\n\n|       | Credit terms     | Payment method   | 9 Aug 20X2 sales   | 9 Jul 20X2 sales   |\n|-------|------------------|------------------|--------------------|--------------------|\n| W Ltd | 1 calendar month | BACS             | ` 150,000          | ` 130,000          |\n| X Ltd | None             | Cheque           | ` 180,000          | ` 160,000          |\n\n- (a) Receipt of money by BACS ( Bankers' Automated Clearing Services) is instantaneous.\n- (b) X Ltd's cheque will be paid into Prachi Ltd's bank account on the same day as the sale is made and will clear on the third day following this (excluding day of payment)."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## (2) Payments to suppliers\n\n| Supplier name   | Credit terms      | Payment method   | 9 Aug 20X2 purchases   | 9 Jul 20X2 purchases   | 9 Jun 20X2 purchases   |\n|-----------------|-------------------|------------------|------------------------|------------------------|------------------------|\n| A Ltd           | 1 calendar month  | Standing order   | ` 65,000               | ` 55,000               | ` 45,000               |\n| B Ltd           | 2 calendar months | Cheque           | ` 85,000               | ` 80,000               | ` 75,000               |\n| C Ltd           | None              | Cheque           | ` 95,000               | ` 90,000               | ` 85,000               |\n\n- (a) Prachi Ltd has set up a standing order for ` 45,000 a month to pay for supplies from A Ltd. This will leave Prachi's bank account on 9 August.\n\na\n\nEvery  few  months,  an  adjustment  is  made  to  reflect  the  actual  cost  of supplies purchased (you do NOT need to make this adjustment).\n\n- (b) Prachi Ltd will send out, by post, cheques to B Ltd and C Ltd on 9 August. The amounts will leave its bank account on the second day following this (excluding the day of posting)."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## (3) Wages and salaries\n\n|                  | July 20X2   | August 20X2   |\n|------------------|-------------|---------------|\n| Weekly wages     | ` 12,000    | ` 13,000      |\n| Monthly salaries | ` 56,000    | ` 59,000      |\n\n- (a) Factory  workers  are  paid  cash  wages  (weekly).  They  will  be  paid  one week's wages, on 1 3 August, for the last week's work done in July (i.e. they work a week in hand).\n- (b) All the office workers are paid salaries (monthly) by BACS. Salaries for July will be paid on 9 August."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## (4) Other miscellaneous payments\n\n- (a) Every  Saturday  morning,  the  petty  cashier  withdraws ` 200  from  the company bank account for the petty cash. The money leaves Prachi's bank account straight away.\n- (b) The room cleaner is paid ` 30 from petty cash every Monday morning.\n- (c) Office stationery will be ordered by telephone on Sunday 10 August to the value of ` 300. This is paid for by company debit card. Such payments are generally seen to leave the company account on the next working day.\n- (d) Five new softwares will be ordered over the Internet on 12 August at a total  cost  of ` 6,500.  A  cheque  will  be  sent  out  on  the  same  day.  The amount will leave Prachi Ltd's bank account on the second day following this (excluding the day of posting)."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## (5) Other information\n\nThe balance on Prachi's bank account will be ` 200,000 on 9 August 20X2. This represents both the book balance and the cleared funds.\n\nPREPARE  a  cleared  funds  forecast  for  the  period  Saturday  7th  August  to Wednesday 13th August 20X2 inclusive using the information provided. Show clearly the uncleared funds float each day.\n\na"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Cleared Funds Forecast\n\n|                         | 9 Aug (Saturday) `      | 10 Aug (Sunday) `   | 11 Aug (Monday) `   | 12 Aug (Tuesday) `   | 13Aug (Wednesday) `   |\n|-------------------------|-------------------------|---------------------|---------------------|----------------------|-----------------------|\n| Receipts                |                         |                     |                     |                      |                       |\n| W Ltd                   | 1,30,000                | 0                   | 0                   | 0                    | 0                     |\n| X Ltd                   | 0                       | 0                   | 0                   | 1,80,000             | 0                     |\n| (a)                     | 1,30,000                | 0                   | 0                   | 1,80,000             | 0                     |\n| Payments                |                         |                     |                     |                      |                       |\n| A Ltd                   | 45,000                  | 0                   | 0                   | 0                    | 0                     |\n| B Ltd                   | 0                       | 0                   | 75,000              | 0                    | 0                     |\n| C Ltd                   | 0                       | 0                   | 95,000              | 0                    | 0                     |\n| Wages                   | 0                       | 0                   | 0                   | 0                    | 12,000                |\n| Salaries                | 56,000                  | 0                   | 0                   | 0                    | 0                     |\n| Petty Cash              | 200                     | 0                   | 0                   | 0                    | 0                     |\n| Stationery              | 0                       | 0                   | 300                 | 0                    | 0                     |\n| (b)                     | 1,01,200                | 0                   | 1,70,300            | 0                    | 12,000                |\n| Cleared excess Receipts | Cleared excess Receipts |                     |                     |                      |                       |\n| over payments (a) - (b) | 28,800                  | 0                   | (1,70,300)          | 1,80,000             | (12,000)              |\n| Cleared balance b/f     | 2,00,000                | 2,28,800            | 2,28,800            | 58,500               | 2,38,500              |\n| Cleared balance c/f (c) | 2,28,800                | 2,28,800            | 58,500              | 2,38,500             | 2,26,500              |\n| Uncleared funds float   | Uncleared funds float   |                     |                     |                      |                       |\n| Receipts                | 1,80,000                | 1,80,000            | 1,80,000            | 0                    | 0                     |\n| Payments                | (1,70,000)              | (1,70,300)          | 0                   | (6,500)              | (6,500)               |\n| (d)                     | 10,000                  | 9,700               | 180,000             | (6,500)              | (6,500)               |\n| Total book balance c/f  | 2,38,800                | 2,38,500            | 2,38,500            | 2,32,000             | 2,20,000              |\n| (c)+ (d)                |                         |                     |                     |                      |                       |"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 10.6 Determining the Optimum Cash Balance\n\nA  firm  should  maintain  optimum  cash  balance  to  cater  to  the  day-to-day operations.    It  may  also  carry  additional  cash  as  a  buffer  or  safety  stock.    The amount of cash balance will depend on the risk-return trade off.  The firm should maintain an optimum level i.e.  just  enough, i.e.  neither  too  much  (to  avoid  any opportunity cost) nor too little cash balance (to settle day to day payments).  This, however, poses a question.  How to determine the optimum cash balance if cash flows are predictable and if they are not predictable?"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 11.  CASH MANAGEMENT MODELS\n\nIn recent years several types of mathematical models have been developed which helps  to  determine  the  optimum  cash  balance  to  be  carried  by  a  business organization.\n\nThe  purpose  of  all  these  models  is  to  ensure  that  cash  does  not  remain  idle unnecessarily and at the same time the firm is not confronted with a situation of cash shortage.\n\nAll these models can be put in two categories:\n\nInventory type models; and Stochastic models.\n\nInventory  type  models  have  been  constructed  to  aid  the  finance  manager  to determine optimum cash balance of his firm.  William J. Baumol's economic order quantity model applies equally to cash management problems under conditions of certainty or where the cash flows are predictable.\n\nHowever, in a situation where the EOQ Model is not applicable, stochastic model of cash management helps in determining the optimum level of cash balance.  It happens when the demand for cash is stochastic and not known in advance."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## FINANCIAL MANAGEMENT\n\nThe carrying costs refer to the cost of holding cash, namely, the opportunity cost or  interest foregone on marketable securities. The transaction costs refer to the cost  involved  in  getting  the  marketable  securities  converted  into  cash.    This happens when the firm falls short of cash and has to sell the securities resulting in clerical, brokerage, registration and other costs.\n\nThe optimum cash balance according to this model will be that point where these two costs are minimum.  The formula for determining optimum cash balance is:\n\n<!-- formula-not-decoded -->\n\nWhere,\n\nC  =  Optimum cash balance\n\nU  =  Annual (or monthly) cash disbursement\n\nP  =\n\nFixed cost per transaction.\n\nS  = Opportunity cost of one rupee p.a. (or p.m.)\n\nThis can be explained with the following diagram:\n\n<!-- image -->\n\nThe model is based on the following assumptions:\n\n- (i) Cash needs of the firm are known with certainty.\n- (ii) The cash is used uniformly over a period of time and it is also known with certainty.\n- (iii) The holding cost is known and it is constant.\n- (iv) The transaction cost also remains constant."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## ILLUSTRATION 10\n\nA firm maintains a separate account for cash disbursement.  Total disbursement are ` 1,05,000 per month or ` 12,60,000 per year.  Administrative and transaction cost of  transferring  cash  to  disbursement  account  is ` 20  per  transfer.    Marketable securities yield is 8% per annum.\n\nDETERMINE the optimum cash balance according to William J. Baumol model."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## SOLUTION\n\n<!-- formula-not-decoded -->\n\n<!-- image -->\n\nThe limitation of the Baumol's model is that it does not allow the cash flows to fluctuate.  Firms in practice do not use their cash balance uniformly nor are they able  to  predict  daily  cash  inflows  and  outflows.    The  Miller-Orr  (MO)  model,  as discussed  below,  overcomes  this  shortcoming  and  allows  for  daily  cash  flow variation."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 11.2 Miller-Orr Cash Management Model (1966)\n\nAccording to this model the net cash flow is completely stochastic .\n\nWhen changes in cash balance occur randomly the application of control theory serves a useful purpose.  The Miller-Orr model is one of such control limit models.\n\nThis model is designed to determine the time and size of transfers between an investment account and cash account.  In this model control limits are set for cash balances.  These limits may consist of h as upper limit, z as the return point; and zero as the lower limit.\n\na\n\na\n\n- When the cash balance reaches the upper limit, the transfer of cash equal to h -z is invested in marketable securities account.\n- When it touches the lower limit, a transfer from marketable securities account to cash account is made.\n- During the period when cash balance stays between (h, z) and (z, 0) i.e. high and  low  limits  no  transactions  between  cash  and  marketable  securities account is made.\n\nThe  high  and  low  limits  of  cash  balance  are  set  up  on  the  basis  of  fixed  cost associated with the securities transactions, the opportunity cost of holding cash and  the  degree  of  likely  fluctuations  in  cash  balances.    These  limits  satisfy  the demands  for  cash  at  the  lowest  possible  total  costs.    The  following  diagram illustrates the Miller-Orr model.\n\n<!-- image -->\n\nThe MO Model is more realistic since it allows variations in cash balance within lower and upper limits.  The finance manager can set the limits according to the firm's liquidity requirements i.e., maintaining minimum and maximum cash balance."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 12.  RECENT DEVELOPMENTS IN CASH MANAGEMENT\n\nIt  is  important  to  understand  the  latest  developments  in  the  field  of  cash management,  since  it  has  a  great  impact  on  how  we  manage  our  cash.  Both technological advancement and desire to reduce cost of operations has led to some innovative techniques in managing cash. Some of them are:-"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 12.1 Electronic Fund Transfer\n\nWith  the  developments  which  took  place  in  the  Information  technology,  the present banking system is switching over to the computerisation of banks branches to  offer  efficient  banking  services  and  cash  management  services  to  their customers. The network will be linked to the different branches, banks.  This will help the customers in the following ways:\n\n- Instant updating of accounts.\n- Quick transfer of funds.\n- Instant information about foreign exchange rates."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 12.2 Zero Balance Account\n\nFor  efficient  cash  management  some  firms  employ  an  extensive  policy  of substituting marketable securities for cash by the use of zero balance accounts. Every day the firm totals the cheques presented for payment against the account. The  firm  transfers  the  balance  amount  of  cash  (in  excess  of  payments)  in  the account if any, for buying marketable securities.  In case of shortage of cash, the firm sells the marketable securities."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 12.3 Money Market Operations\n\nOne of the tasks of 'treasury  function' of  larger  companies  is  the  investment  of surplus  funds  in  the  money  market.    The  chief  characteristic  of  money  market banking is one of size.  Banks obtain funds by competing in the money market for the deposits by the companies, public authorities, High Net worth Investors (HNI), and other banks.  Deposits are made for specific periods ranging from overnight to one year; highly competitive rates which reflect supply and demand on a daily, even\n\na\n\na\n\nhourly basis are quoted.  Consequently, the rates can fluctuate quite dramatically, especially  for  the  shorter-term  deposits.    Surplus  funds  can  thus  be  invested  in money market easily."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 12.4 Petty Cash Imprest System\n\nFor better control on cash, generally the companies use petty cash imprest system wherein  the  day-to-day  petty  expenses  are  estimated  taking  into  account  past experience and future needs and generally a week's requirement of cash will be kept separate for making petty expenses.  Again, the next week will commence with the  pre-determined  balance.    This  will  reduce  the  strain  of  the  management  in managing petty cash expenses and help in the managing cash efficiently."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 12.5 Management of Temporary Cash Surplus\n\nTemporary cash surpluses can be profitably invested in the following:\n\n- Short-term deposits in Banks and financial institutions.\n- Short-term debt market instruments.\n- Or Long Term Debt Instruments with flexible maturity datesShares of Blue chip listed companies.\n\nChoice of investment can be based on economic situation, volatility of returns and also the risk appetite of the organization."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 12.6 Electronic Cash Management System\n\nMost of the cash management systems now-a-days are electronically based, since 'speed' is the essence of any cash management system.  Electronically, transfer of data as well as funds play a key role in any cash management system.  Various elements in the process of cash management are linked through a satellite.  Various places that are interlinked may be the place where the instrument is collected, the place where cash is to be transferred in company's account, the place where the payment is to be transferred etc.\n\nCertain networked cash management system may also provide a very limited access to third parties like parties having very regular dealings of receipts and payments with the company etc.  A finance company accepting deposits from public through\n\na\n\nsub-brokers may give a limited access to sub-brokers to verify the collections made through him for determination of his commission among other things."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Electronic-scientific cash management results in:\n\n- Significant saving in time.\n- Increase in interest earned &amp; decrease in interest expense.\n- Reduces paper-work &amp; hence manpower.\n- Greater accounting accuracy as it allows easy detection of book-keeping errors.\n- More control over time and funds.\n- Supports electronic payments.\n- Faster transfer of funds from one location to another, where required.\n- Speedy conversion of various instruments into cash.\n- Making available funds wherever required, whenever required.\n- Reduction in the amount of 'idle float' to the maximum possible extent.\n- Ensures no idle funds are placed at any place in the organization.\n- It makes inter-bank balancing of funds much easier.\n- It is a true form of centralized 'Cash Management'.\n- Produces faster electronic reconciliation.\n- Reduces the number of cheques issued."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 12.7 Virtual Banking\n\nThe practice of banking has undergone a significant change in the nineties.  While banks are striving to strengthen customer base and relationship and move towards relationship banking, customers are increasingly moving away from the confines of traditional branch banking and are seeking the convenience of remote electronic banking services including net banking &amp; mobile banking.  And even within the broad spectrum of electronic banking the virtual banking has gained prominence\n\nBroadly  virtual  banking  denotes  the  provision  of  banking  and  related  services through extensive use of information technology without direct recourse to the bank by the customer.  The origin of virtual banking in the developed countries can be traced back to the seventies with the installation of Automated Teller Machines\n\na\n\n(ATMs). Subsequently, driven by the competitive market environment as well as various  technological  and  customer  pressures,  other  types  of  virtual  banking services have grown in prominence throughout the world.\n\nThe Reserve Bank of India has been taking a number of initiatives, which will facilitate the active involvement of commercial banks in the sophisticated cash management system. One of the pre-requisites to ensure faster and reliable mobility of funds in a country is to have an efficient payment system.  Considering the importance of speed in payment system to the economy, the RBI has taken numerous measures since midEighties to strengthen the payments mechanism in the country.\n\nIntroduction of computerized settlement of clearing transactions, use of Magnetic Ink  Character  Recognition  (MICR)  technology,  provision  of  inter-city  clearing facilities  and  high  value  clearing  facilities,  Electronic  Clearing  Service  Scheme (ECSS), Electronic Funds Transfer (EFT) scheme, UPI payment platforms, Real Time Gross  Settlement  System  (RTGS),  Delivery  vs.  Payment  (DVP)  for  Government securities transactions, setting up of Indian Financial Network (INFINET) are some of the significant developments.\n\nOther than above, Introduction of Centralised Funds Management System (CFMS), Securities Services System (SSS) and Structured Financial Messaging System (SFMS) have been the other top priority items on the agenda to transform the existing system into a state-of-the art payment infrastructure in India.\n\nThe  current  vision  envisaged  for  the  payment  systems  reforms  is  one,  which contemplates  linking  up  of  all  the  remaining  bank  branches  with  the  domestic payment systems network thereby facilitating cross border connectivity.  With the help of the systems already put in place in India and which are coming into being, both banks and corporates can exercise effective control over the cash management."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Advantages of Virtual Banking\n\nThe advantages of virtual banking services are as follows:\n\n- Lower cost of handling a transaction.\n- The increased speed of response to customer requirements.\n\na\n\n- The lower cost of operating branch network along with reduced staff costs leads to cost efficiency.\n- Virtual banking allows the possibility of improved and a range of services being  made  available  to  the  customer  rapidly,  accurately  and  at  his convenience.\n\nThe popularity which virtual banking services have won among customers is due to the speed, convenience and round the clock access they offer.\n\n<!-- image -->"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 13.  MANAGEMENT OF MARKETABLE SECURITIES\n\nManagement of marketable securities is an integral part of investment of cash as this  may  serve  both  the  purposes  of  liquidity  and  cash,  provided  choice  of investment is made correctly.  As the working capital needs are fluctuating, it is possible to park excess funds in some short-term securities, which can be liquidated when need for cash is felt.  The selection of securities should be guided by three principles.\n\n- Safety :  Return and risks go hand in hand.  As the objective in this investment is ensuring liquidity, minimum risk is the criterion of selection.\n- Maturity: Matching of maturity and forecasted cash needs is essential.  Prices of long term securities fluctuate more with changes in interest rates and are therefore,  riskier.  Since  this  is  for  temporary  excess  funds,  short  term securities are preferred.\n- Marketability: It refers to the convenience, speed and cost at which a security can be converted into cash.  If the security can be sold quickly without loss of time and price it is highly liquid or marketable.\n\nThe choice of marketable securities is mainly limited to Government treasury bills, Deposits with banks and Inter-corporate deposits. Units of Unit Trust of India and commercial  papers  of  corporates  are  other  attractive  means  of  parking  surplus funds  for  companies  along  with  deposits  with  sister  concerns  or  associate companies.\n\nBesides this Money Market Mutual Funds (MMMFs) have also emerged as one of the avenues of short-term investment."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## ILLUSTRATION 11\n\nThe following information is available in respect of Sai trading company:\n\n- (i) On an average, debtors are collected after 45 days; inventories have an average holding period of 75 days and creditor's payment period on an average is 30 days .\n- (ii) The firm spends a total of ` 120 lakhs annually at a constant rate.\n- (iii) It can earn 10 per cent on investments.\n\nFrom the above information, you are required to CALCULATE:\n\n- (a) The cash cycle and cash turnover,\n- (b) Minimum amounts of cash to be maintained to meet payments as they become due,\n- (c) Savings by reducing the average inventory holding period by 30 days."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_2_Treasury.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## SOLUTION\n\n- (a) Cash cycle = 45 days + 75 days -30 days = 90 days (3 months)\n- Cash turnover = 12 months (360 days)/3 months (90 days) = 4.\n- (b) Minimum operating cash = Total operating annual outlay/cash turnover, that is, ` 120 lakhs/4 = ` 30 lakhs.\n- (c) Cash cycle = 45 days + 45 days -30 days = 60 days (2 months).\n\nCash turnover = 12 months (360 days)/2 months (60 days) = 6.\n\nMinimum operating cash = ` 120 lakhs/6 = ` 20 lakhs.\n\nReduction in investments = ` 30 lakhs -` 20 lakhs = ` 10 lakhs.\n\nSavings = 0.10 \u00d7 ` 10 lakhs = ` 1 lakh.\n\na"}]

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+[{"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 15.  MEANING AND OBJECTIVE\n\nManagement of receivables refers to planning and controlling of 'debt' owed to the firm from customer on account of credit sales. It is also known as trade credit management.\n\nThe  basic  objective  of  management  of  receivables  (debtors)  is  to  optimise  the return on investment on these assets.\n\nWhen large amounts are tied up in receivables, there are chances of bad debts and there  will  be  cost  of  collection  of  debts.    On  the  contrary,  if  the  investment  in receivables is low, the sales may be restricted, since the competitors may offer more liberal terms.  Therefore, management of receivables is an important issue and requires proper policies and their implementation."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 16.  ASPECTS OF MANAGEMENT OF DEBTORS\n\nThere are basically three aspects of management of receivables:\n\n1. Credit Policy: A balanced credit policy should be determined for effective management of receivables. Decision of Credit standards, Credit terms and collection efforts is included in Credit policy.  It involves a trade-off between the profits on additional sales that arise due to credit being extended on the one hand and the cost of carrying those debtors and bad debt losses on the other.  This seeks to decide credit period, cash discount and other relevant matters.    The  credit  period  is  generally  stated  in  terms  of  net  days.  For example, if the firm's credit terms are 'net 50'.  It is expected that customers will repay credit obligations not later than 50 days.\n\nFurther, the cash discount policy of the firm specifies:\n\n- (a) The rate of cash discount.\n- (b) The cash discount period; and\n- (c) The net credit period.\n\na\n\nFor example, the credit terms may be expressed as '3/15 net 60'.  This means that a 3% discount will be granted if the customer pays within 15 days; if he does not avail the offer he must make payment within 60 days.\n\n2. Credit Analysis: This requires the finance manager to determine as to how risky it is to advance credit to a particular party. This involves due diligence or reputation check of the customers with respect to their credit worthiness.\n3. Control of Receivable: This requires finance manager to follow up debtors and decide about a suitable credit collection policy.  It involves both laying down of credit policies and execution of such policies.\n\nThere is always cost of maintaining receivables which comprises of following costs:\n\n- (i) The  company  requires  additional  funds  as  resources  are  blocked  in receivables which involves a cost in the form of interest (loan funds) or opportunity cost (own funds)\n- (ii) Administrative  costs  which  include  record  keeping,  investigation  of credit worthiness etc.\n- (iii) Collection costs.\n- (iv) Defaulting costs."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 17.  FACTORS DETERMINING CREDIT POLICY\n\nThe  credit  policy  is  an  important  factor  determining  both  the  quantity  and  the quality  of  accounts  receivables.    Various  factors  determine  the  size  of  the investment a company makes in accounts receivables.  They are, for instance:\n\n- (i) The effect of credit on the volume of sales;\n- (ii) Credit terms;\n- (iii) Cash discount;\n- (iv) Policies and practices of the firm for selecting credit customers;\n- (v) Paying practices and habits of the customers;\n- (vi) The firm's policy and practice of collection; and\n\na\n\n- (vii) The  degree  of  operating  efficiency  in  the  billing,  record  keeping  and adjustment  function,  other  costs  such  as  interest,  collection  costs  and  bad debts  etc.,  would  also  have  an  impact  on  the  size  of  the  investment  in receivables.    The  rising  trend  in  these  costs  would  depress  the  size  of investment in receivables.\n\nThe firm may follow a lenient or a stringent credit policy.  The firm which follows a lenient credit policy sells on credit to customers on very liberal terms and standards. On the contrary a firm following a stringent credit policy sells on credit on a highly selective basis only to those customers who have proper credit worthiness and who are financially sound.\n\nAny increase in accounts receivables that is, additional extension of trade credit not only results in higher sales but also requires additional financing to support the increased investment in accounts receivables.  The costs of credit investigations and collection  efforts  and  the  chances  of  bad  debts  are  also  increased.  On  the contrary, a decrease in accounts receivable due to a stringent credit policy may be as a result of reduced sales with competitors offering better credit terms."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 18.  FACTORS  UNDER  THE  CONTROL  OF  THE FINANCE MANAGER\n\nThe  finance  manager  has  operating  responsibility  for  the  management  of  the investment in receivables.  His involvement includes:-\n\n- (a) Supervising the administration of credit;\n- (b) Contribute to top management decisions relating to the best credit policies of the firm;\n- (c) Deciding the criteria for selection of credit applications; and\n- (d) Speed up the  conversion  of  receivables  into  cash  by  aggressive  collection policy.\n\nIn  summary  the  finance  manager  has  to  strike  a  balance  between  the  cost  of increased investment in receivables and profits from the higher levels of sales.\n\na"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Statement showing the Evaluation of Credit Policies (based on Total Approach)\n\n| Particulars                                                                      | Present Policy   | Proposed Policy I   | Proposed Policy II   | Proposed Policy III   |\n|----------------------------------------------------------------------------------|------------------|---------------------|----------------------|-----------------------|\n|                                                                                  | `                | `                   | `                    | `                     |\n| A. Expected Profit:                                                              |                  |                     |                      |                       |\n| (a) Credit Sales                                                                 | \u2026\u2026\u2026.             | \u2026\u2026\u2026\u2026.               | \u2026\u2026\u2026..                | \u2026\u2026\u2026.                  |\n| (b) Total Cost other than Bad Debts                                              |                  |                     |                      |                       |\n| (i)Variable Costs                                                                | \u2026\u2026\u2026              | \u2026\u2026\u2026\u2026                | \u2026\u2026\u2026.                 | \u2026\u2026\u2026.                  |\n| (ii) Fixed Costs                                                                 | \u2026\u2026\u2026              | \u2026\u2026\u2026\u2026                | \u2026\u2026\u2026.                 | \u2026\u2026\u2026.                  |\n|                                                                                  | \u2026\u2026\u2026              | \u2026\u2026\u2026.                | \u2026\u2026\u2026.                 | \u2026\u2026..                  |\n| (c) Bad Debts (d) Cash discount                                                  | \u2026\u2026\u2026              | \u2026\u2026\u2026\u2026                | \u2026\u2026\u2026                  | \u2026\u2026\u2026.                  |\n| (e) Expected Net Profit before Tax (a-b-c-d)                                     | .\u2026\u2026..            | \u2026\u2026\u2026..               | \u2026\u2026\u2026                  | \u2026\u2026\u2026.                  |\n| (f) Less: Tax                                                                    | \u2026\u2026...            | \u2026\u2026\u2026..               | \u2026\u2026\u2026.                 | \u2026\u2026\u2026                   |\n| (g) Expected Profit after Tax                                                    | ..\u2026\u2026.            | \u2026\u2026\u2026                 | \u2026\u2026\u2026                  | \u2026\u2026\u2026                   |\n| B. Opportunity Cost of Investments in Receivables locked up in Collection Period | ..\u2026\u2026             | \u2026\u2026\u2026                 | \u2026\u2026\u2026.                 | \u2026\u2026\u2026                   |\n| Net Benefits (A - B)                                                             | \u2026\u2026\u2026              | \u2026\u2026\u2026                 | \u2026\u2026\u2026                  | \u2026\u2026\u2026.                  |\n\nAdvise: The Policy\u2026\u2026. should be adopted since the net benefits under this policy are higher as compared to other policies."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Here\n\n- (i) Total Fixed Cost = [Average Cost per unit -Variable Cost per unit] \u00d7 No. of units sold on credit under Present Policy\n- (ii)\n- Opportunity Cost = Total Cost of Credit Sales \u00d7 Collection period (Days) Required Rate of Return \u00d7\n\n365 (or 360)\n\n100"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Statement showing the Evaluation of Credit Policies (based on Incremental Approach)\n\n| Particulars                                    | Particulars                                    | Present Policy days   | Proposed Policy I days   | Proposed Policy II days   | Proposed Policy III days   |\n|------------------------------------------------|------------------------------------------------|-----------------------|--------------------------|---------------------------|----------------------------|\n|                                                |                                                | `                     | `                        | `                         | `                          |\n| A.                                             | Incremental Expected Profit:                   |                       |                          |                           |                            |\n| Credit Sales                                   | Credit Sales                                   | \u2026\u2026\u2026.                  | \u2026\u2026\u2026\u2026.                    | \u2026\u2026\u2026..                     | \u2026\u2026\u2026.                       |\n| (a)                                            | Incremental Credit Sales                       | \u2026\u2026\u2026.                  | \u2026\u2026\u2026\u2026.                    | \u2026\u2026\u2026..                     | \u2026\u2026\u2026.                       |\n| (b)                                            | Less: Incremental Costs of Credit Sales        |                       |                          |                           |                            |\n|                                                | (i) Variable Costs                             | \u2026\u2026\u2026.                  | \u2026\u2026\u2026\u2026.                    | \u2026\u2026\u2026..                     | \u2026\u2026\u2026.                       |\n|                                                | (ii) Fixed Costs                               | \u2026\u2026\u2026.                  | \u2026\u2026\u2026\u2026.                    | \u2026\u2026\u2026..                     | \u2026\u2026\u2026.                       |\n| (c)                                            | Incremental Bad Debt Losses                    | \u2026\u2026\u2026.                  | \u2026\u2026\u2026\u2026.                    | \u2026\u2026\u2026..                     | \u2026\u2026\u2026.                       |\n| (d)                                            | Incremental Cash Discount                      | \u2026\u2026\u2026.                  | \u2026\u2026\u2026\u2026.                    | \u2026\u2026\u2026..                     | \u2026\u2026\u2026.                       |\n| (e)                                            | Incremental Expected Profit (a-b-c-d)          | \u2026\u2026\u2026.                  | \u2026\u2026\u2026\u2026.                    | \u2026\u2026\u2026..                     | \u2026\u2026\u2026.                       |\n| (f)                                            | Less : Tax                                     | \u2026\u2026\u2026.                  | \u2026\u2026\u2026\u2026.                    | \u2026\u2026\u2026..                     | \u2026\u2026\u2026.                       |\n| (g)                                            | Incremental Expected Profit after Tax          | \u2026\u2026\u2026.                  | \u2026\u2026\u2026\u2026.                    | \u2026\u2026\u2026..                     | \u2026\u2026\u2026.                       |\n|                                                |                                                | \u2026\u2026\u2026.                  | \u2026\u2026\u2026\u2026.                    | \u2026\u2026\u2026..                     | \u2026\u2026\u2026.                       |\n| B. Required Return on Incremental Investments: | B. Required Return on Incremental Investments: |                       |                          |                           |                            |\n| (a)                                            | Cost of Credit Sales                           | \u2026\u2026\u2026.                  | \u2026\u2026\u2026\u2026.                    | \u2026\u2026\u2026..                     | \u2026\u2026\u2026.                       |\n| (b)                                            | Collection Period (in days)                    | \u2026\u2026\u2026.                  | \u2026\u2026\u2026\u2026.                    | \u2026\u2026\u2026..                     | \u2026\u2026\u2026.                       |\n| (c)                                            | Investment in Receivable (a \u00d7 b/365 or 360)    | \u2026\u2026\u2026.                  | \u2026\u2026\u2026\u2026.                    | \u2026\u2026\u2026..                     | \u2026\u2026\u2026.                       |\n\na"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## MANAGEMENT OF WORKING CAPITAL\n\na\n\n| (d)                              | Incremental Investment in Receivables              | \u2026\u2026\u2026.   | \u2026\u2026\u2026\u2026.   | \u2026\u2026\u2026..   | \u2026\u2026\u2026.   |\n|----------------------------------|----------------------------------------------------|--------|---------|---------|--------|\n| (e)                              | Required Rate of Return (in %)                     | \u2026\u2026\u2026.   | \u2026\u2026\u2026\u2026.   | \u2026\u2026\u2026..   | \u2026\u2026\u2026.   |\n| (f)                              | Required Return on Incremental Investments (d \u00d7 e) | \u2026\u2026\u2026.   | \u2026\u2026\u2026\u2026.   | \u2026\u2026\u2026..   | \u2026\u2026\u2026.   |\n| Incremental Net Benefits (A - B) | Incremental Net Benefits (A - B)                   | \u2026\u2026\u2026.   | \u2026\u2026\u2026\u2026.   | \u2026\u2026\u2026..   | \u2026\u2026\u2026.   |\n\nAdvise: The Policy \u2026\u2026should be adopted since net benefits under this policy are higher as compared to other policies."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## ILLUSTRATION 12\n\nA trader whose current sales are in the region of ` 6 lakhs per annum and an average collection period of 30 days wants to pursue a more liberal policy to improve sales. A study made by a management consultant reveals the following information:-\n\n| Credit Policy   | Increase in collection period   | Increase in sales   | Present default anticipated   |\n|-----------------|---------------------------------|---------------------|-------------------------------|\n| A               | 10 days                         | ` 30,000            | 1.5%                          |\n| B               | 20 days                         | ` 48,000            | 2%                            |\n| C               | 30 days                         | ` 75,000            | 3%                            |\n| D               | 45 days                         | ` 90,000            | 4%                            |\n\nThe selling price per unit is ` 3.  Average cost per unit is ` 2.25 and variable costs per unit  are ` 2.  The  current  bad  debt  loss  is  1%.    Required  return  on  additional investment is 20%.  Assume a 360 days year.\n\nANALYSE which of the above policies would you recommend for adoption?"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## A. Statement showing the Evaluation of Debtors Policies (Total Approach)\n\n| Particulars   | Particulars                                    | Present Policy 30 days   | Proposed Policy A 40 days   | Proposed Policy B 50 days   | Proposed Policy C 60 days   | Proposed Policy D 75 days   |\n|---------------|------------------------------------------------|--------------------------|-----------------------------|-----------------------------|-----------------------------|-----------------------------|\n|               |                                                | `                        | `                           | `                           | `                           | `                           |\n| A.            | Expected Profit:                               |                          |                             |                             |                             |                             |\n|               | (a) Credit Sales                               | 6,00,000                 | 6,30,000                    | 6,48,000                    | 6,75,000                    | 6,90,000                    |\n|               | (b) Total Cost other than Bad Debts            |                          |                             |                             |                             |                             |\n|               | (i) Variable Costs [Sales \u00d7 2/ 3]              | 4,00,000                 | 4,20,000                    | 4,32,000                    | 4,50,000                    | 4,60,000                    |\n|               | (ii)Fixed Costs                                | 50,000                   | 50,000                      | 50,000                      | 50,000                      | 50,000                      |\n|               |                                                | 4,50,000                 | 4,70,000                    | 4,82,000                    | 5,00,000                    | 5,10,000                    |\n|               | (c) Bad Debts                                  | 6,000                    | 9,450                       | 12,960                      | 20,250                      | 27,600                      |\n|               | (d) Expected Profit [(a) - (b) - (c)]          | 1,44,000                 | 1,50,550                    | 1,53,040                    | 1,54,750                    | 1,52,400                    |\n| B.            | Opportunity Cost of Investments in Receivables | 7,500                    | 10,444                      | 13,389                      | 16,667                      | 21,250                      |\n| C.            | Net Benefits (A - B)                           | 1,36,500                 | 1,40,106                    | 1,39,651                    | 1,38,083                    | 1,31,150                    |\n\nRecommendation: The Proposed Policy A (i.e. increase in collection period by 10 days or total 40 days) should be adopted since the net benefits under this policy are higher as compared to other policies."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Working Notes:\n\n- (i) Calculation of Fixed Cost = [Average Cost per unit -Variable Cost per unit] \u00d7 No. of Units sold\n\n= [ ` 2.25 -` 2.00] \u00d7 ( ` 6,00,000/3)\n\n= ` 0.25 \u00d7 2,00,000 = ` 50,000\n\na"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## (ii) Calculation of Opportunity Cost of Average Investments\n\n<!-- formula-not-decoded -->\n\n<!-- formula-not-decoded -->\n\n<!-- formula-not-decoded -->\n\n<!-- formula-not-decoded -->\n\n<!-- formula-not-decoded -->\n\n<!-- formula-not-decoded -->\n\n<!-- formula-not-decoded -->\n\n- B. Another method of solving the problem is Incremental Approach .  Here we assume that sales are all credit sales.\n\n| Particulars   | Particulars                                  | Present Policy 30 days   | Proposed Policy A 40 days   | Proposed Policy B 50 days   | Proposed Policy C 60 days   | Proposed Policy D 75 days   |\n|---------------|----------------------------------------------|--------------------------|-----------------------------|-----------------------------|-----------------------------|-----------------------------|\n|               |                                              | `                        | `                           | `                           | `                           | `                           |\n| A.            | Incremental Expected Profit:                 |                          |                             |                             |                             |                             |\n|               | (a) Incremental Credit Sales                 | ---                      | 30,000                      | 48,000                      | 75,000                      | 90,000                      |\n|               | (b) Incremental Costs                        |                          |                             |                             |                             |                             |\n|               | (i) Variable Costs                           | ---                      | 20,000                      | 32,000                      | 50,000                      | 60,000                      |\n|               | (ii)Fixed Costs                              | ---                      | -                           | -                           | -                           | -                           |\n|               | (c) Incremental Bad Debt Losses              | ---                      | 3,450                       | 6,960                       | 14,250                      | 21,600                      |\n|               | (d) Incremental Expected Profit (a - b - c)] |                          | 6,550                       | 9,040                       | 10,750                      | 8,400                       |\n| B.            | Required Return on Incremental               |                          |                             |                             |                             |                             |\n\na"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## FINANCIAL MANAGEMENT\n\n| Investments:                                          |          |          |          |          |          |\n|-------------------------------------------------------|----------|----------|----------|----------|----------|\n| (a) Cost of Credit Sales                              | 4,50,000 | 4,70,000 | 4,82,000 | 5,00,000 | 5,10,000 |\n| (b) Collection period                                 | 30       | 40       | 50       | 60       | 75       |\n| (c) Investment in Receivable (a \u00d7 b/360)              | 37,500   | 52,222   | 66,944   | 83,333   | 1,06,250 |\n| (d) Incremental Investment in Receivables             | ---      | 14,722   | 29,444   | 45,833   | 68,750   |\n| (e) Required Rate of Return (in %)                    |          | 20       | 20       | 20       | 20       |\n| (f) Required Return on Incremental Investments (d\u00d7 e) | ---      | 2,944    | 5,889    | 9,167    | 13,750   |\n| Net Benefits (A - B)                                  | ---      | 3,606    | 3,151    | 1,583    | - 5,350  |\n\nRecommendation: The Proposed Policy A should be adopted since the net benefits under this policy are higher than those under other policies.\n\n- C. Another method of solving the problem is by computing the Expected Rate of Return .\n\n| Expected Rate of Return=   | Incremental Expected Profit \u00d7100 Incremental Investment in Receivables   |\n|----------------------------|--------------------------------------------------------------------------|\n| For Policy A =             | ` ` 6,550 \u00d7100=44.49% 14,722                                             |\n| For Policy B = `           | ` 9,040 \u00d7100=30.70% 29,444                                               |\n| For Policy C =             | ` ` 10,750 \u00d7100=23.45% 45,833                                            |\n| For Policy D =             | ` ` 8,400 \u00d7100=12.22% 68,750                                             |"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## ILLUSTRATION 13\n\nXYZ Corporation is considering relaxing its present credit policy and is in the process of evaluating two proposed policies.  Currently, the firm has annual credit sales of ` 50 lakhs and accounts receivable turnover ratio of 4 times a year.  The current level of loss due to bad debts is ` 1,50,000.  The firm is required to give a return of 25% on the investment in new accounts receivables.  The company's variable costs are 70% of the selling price.  Given the following information, IDENTIFY which is the better option?"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## (Amount in ` )\n\n|                                    | Present Policy   | Policy Option I   | Policy Option II   |\n|------------------------------------|------------------|-------------------|--------------------|\n| Annual credit sales                | 50,00,000        | 60,00,000         | 67,50,000          |\n| Accounts receivable turnover ratio | 4 times          | 3 times           | 2.4 times          |\n| Bad debt losses                    | 1,50,000         | 3,00,000          | 4,50,000           |"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Statement showing the Evaluation of Debtors Policies\n\n| Particulars                           | Present Policy   | Proposed Policy I   | Proposed Policy II   |\n|---------------------------------------|------------------|---------------------|----------------------|\n|                                       | `                | `                   | `                    |\n| A Expected Profit:                    |                  |                     |                      |\n| (a) Credit Sales                      | 50,00,000        | 60,00,000           | 67,50,000            |\n| (b) Total Cost other than Bad Debts:  |                  |                     |                      |\n| (i) Variable Costs                    | 35,00,000        | 42,00,000           | 47,25,000            |\n| (c) Bad Debts                         | 1,50,000         | 3,00,000            | 4,50,000             |\n| (d) Expected Profit [(a) - (b) - (c)] | 13,50,000        | 15,00,000           | 15,75,000            |\n\na"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## FINANCIAL MANAGEMENT\n\n| B Opportunity Cost of Investments in Receivables   | 2,18,750                         | 3,50,000   | 4,92,188   |\n|----------------------------------------------------|----------------------------------|------------|------------|\n| C Net Benefits (A - B) 11,31,250                   | C Net Benefits (A - B) 11,31,250 | 11,50,000  | 10,82,812  |\n\nRecommendation: The Proposed Policy I should be adopted since the net benefits under this policy are higher as compared to other policies.\n\nWorking Note: Calculation of Opportunity Cost of Average Investments\n\n<!-- formula-not-decoded -->\n\n<!-- formula-not-decoded -->\n\nCollection Period in months = 12 / Accounts Receivable Turnover Ratio\n\nPresent Policy\n\n= ` 35,00,000 \u00d7 3/12 \u00d7 25% = ` 2,18,750\n\nProposed Policy I\n\n= ` 42,00,000 \u00d7 4/12 \u00d7 25% = ` 3,50,000\n\nProposed Policy II\n\n= ` 47,25,000 \u00d7 5/12 \u00d7 25% = ` 4,92,188"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## ILLUSTRATION 14\n\nA company is presently having credit sales of \u20b9 12 lakh.  The existing credit terms are 1/10, net 45 days and average collection period is 30 days.  The current bad debts loss is 1.5%.  In order to accelerate the collection process further as also to increase sales, the company is contemplating liberalization of its existing credit terms to 2/10, net 45 days. It is expected that sales are likely to increase by 1/3 of existing sales, bad debts increase to 2% of sales and average collection period to decline to 20 days.  The contribution to sales ratio of the company is 22% and opportunity cost of investment in receivables is 15 percent (pre-tax). 50 per cent and 80 percent of customers in terms of sales revenue are expected to avail cash discount under existing and liberalization scheme respectively. The tax rate is 30%.\n\nADVISE, should the company change its credit terms? (Assume 360 days in a year)."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Statement showing Evaluation of Credit Policies\n\n| Particulars                                   | Present Policy   | Proposed Policy   |\n|-----------------------------------------------|------------------|-------------------|\n| Credit Sales                                  | 12,00,000        | 16,00,000         |\n| Variable Cost @78%* of sales                  | 9,36,000         | 12,48,000         |\n| Bad Debts @1.5% and 2%                        | 18,000           | 32,000            |\n| Cash Discount                                 | 6,000            | 25,600            |\n| Profit before tax                             | 2,40,000         | 2,94,400          |\n| Tax @30%                                      | 72,000           | 88,320            |\n| Profit after Tax                              | 1,68,000         | 2,06,080          |\n| Opportunity Cost of Investment in Receivables | 8,190            | 7,280             |\n| Net Profit                                    | 1,59,810         | 1,98,800          |\n\nAdvise: Proposed policy should be adopted since the net benefit is increased by ( ` 1,98,800 -` 1,59,810) ` 38,990.\n\na\n\n<!-- image -->\n\na"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 20.1 Pledging and Factoring\n\nPledging  of  accounts  receivables  and  Factoring  have  emerged  as  the  important sources of financing of accounts receivables now-a-days.\n\n- (i) Pledging: This refers to the use of a firm's receivable to secure a short term loan.  After cash, a firm's receivables can be termed as its most liquid assets and this serve as prime collateral for a secured loan. The lender scrutinizes the quality of the account receivables, selects acceptable accounts, creates a lien on  the  collateral  and  fixes  the  percentage  of  financing  receivables  which ranges  around  50  to  90%.    The  major  advantage  of  pledging  accounts receivables is the ease and flexibility it provides to the borrower. Moreover, financing is done regularly.  This, however, suffers on account of high cost of financing. Also being a loan, it leaves an impact on the debt equity ratio as well by increasing the amount of debt.\n- (ii) Factoring: Factoring  is  a  relatively  new  concept  in  financing  of  accounts receivables.  This refers to outright sale of accounts receivables to a factor or a financial agency.  A factor is a firm that acquires the receivables of other firms. The factoring lays down the conditions of the sale in a factoring agreement.  The factoring agency bears the risk of collection and services the accounts for a fee.\n\n<!-- image -->"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## MANAGEMENT OF WORKING CAPITAL\n\na\n\nFactoring  arrangement  can  be  either  on  a  recourse  basis  or  on  a  non-recourse basis:\n\n- -Recourse : In case factor is unable to collect the amount from receivables then, factor  can  turn  back  the  same  to  the  organization  for  resolution  (which generally is by replacing those receivables with new receivables)\n- -Non-Recourse : The factor bears the ultimate risk of loss in case of default and hence in such cases they charge higher commission.\n\nThere are a number of financial institutions providing factoring services in India. Some commercial banks and  other  financial  agencies  provide  this  service.    The biggest advantages of factoring are the immediate conversion of receivables into cash and predicted pattern of cash flows.  Financing receivables with the help of factoring can help a company having liquidity without creating a net liability on its  financial  condition and  hence  no  impact  on  debt  equity  ratio.    Besides, factoring is a flexible financial tool providing timely funds, efficient record keepings and effective management of the collection process.  This is not considered as a loan.  There is no debt repayment and hence no compromise to balance sheet, no long-term agreements or delays associated with other methods of raising capital. Factoring allows the firm to use cash for the growth needs of business.\n\nThe basic format of evaluating factoring proposal is given as under:"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Statement showing the Evaluation of Factoring Proposal\n\n| Particulars                                                                                                                                                                                         | `      |\n|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|\n| Annual Savings (Benefit) on taking Factoring Service                                                                                                                                                |        |\n| Cost of credit administration saved                                                                                                                                                                 | \u2026\u2026\u2026... |\n| Bad debts avoided                                                                                                                                                                                   | \u2026\u2026\u2026\u2026   |\n| Interest saved due to reduction in average collection period (Wherever applicable) [Cost of Annual Credit Sales \u00d7 Rate of Interest \u00d7 (Present Collection Period - New Collection Period)/360* days] | \u2026\u2026\u2026\u2026   |\n| Total                                                                                                                                                                                               | \u2026\u2026\u2026..  |\n\na"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## FINANCIAL MANAGEMENT\n\n| B.   | Annual Cost of Factoring to the Firm:                                                                                                                                                                                                               |        |\n|------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|\n|      | Factoring Commission [Annual credit Sales \u00d7 % of Commission (or calculated annually)]                                                                                                                                                               | \u2026\u2026\u2026..  |\n|      | Interest Charged by Factor on advance (or calculated annually ) [Amount available for advance or (Annual Credit Sales - Factoring Commission - Factoring Reserve)] \u00d7 [ CollectionPeriod(days) \u00d7RateofInterest] 360*                                 | \u2026\u2026\u2026... |\n|      | Total                                                                                                                                                                                                                                               | \u2026\u2026\u2026..  |\n| C.   | Net Annual Benefits/Cost of Factoring to the Firm:                                                                                                                                                                                                  | A-B    |\n|      | Rate of Effective Cost of Factoring to the Firm = Net AnnualcostofFactoring \u00d7100 Amountavailablefor advance or = Net AnnualcostofFactoring \u00d7100 Advancestobepaid Advances to be paid = (Amount available for advance - Interest deducted by factor) |        |"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Advise:\n\n1. The  company  should  avail  Factoring  services  if  rate  of  effective  Cost  of Factoring to the firm is less than the existing cost of borrowing or if availing services of factoring results in to positive Net Annual Benefits.\n2. The company should not avail Factoring services if the Rate of Effective Cost of Factoring to the Firm is more than the existing cost of borrowing ."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## ILLUSTRATION 15\n\nA Factoring firm has credit sales of ` 360 lakhs and its average collection period is 30 days.  The financial controller estimates, bad debt losses are around 2% of credit sales. The firm spends ` 1,40,000 annually on debtor ' s administration.  This cost comprises of telephonic and fax bills along with salaries of staff members.  These are the avoidable costs.  A Factoring firm has offered to buy the firm's receivables.  The factor will charge 1% commission and will pay an advance against receivables on an interest @15% p.a. after withholding 10% as reserve.  ANALYSE what should the firm do?\n\nAssume 360 days in a year."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Working notes:\n\n| Average level of receivables = ` 360 lakhs \u00d7   | 360 30 = 30 lakhs   |             |\n|------------------------------------------------|---------------------|-------------|\n| Factoring Commission = 1% of ` 30,00,000       | =                   | ` 30,000    |\n| Reserve = 10% of ` 30,00,000                   | =                   | ` 3,00,000  |\n| Total (i)                                      | =                   | ` 3,30,000  |\n| Thus, the amount available for advance is      |                     |             |\n| Average level of receivables                   |                     | ` 30,00,000 |\n| Less : Total (i) from above                    |                     | ` 3,30,000  |\n| (ii)                                           |                     | ` 26,70,000 |\n| Less : Interest @15% p.a. for 30 days          |                     | ` 33,375    |\n| Net Amount of Advance available.               |                     | ` 26,36,625 |"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Evaluation of Factoring Proposal\n\n|     | Particulars                   | `                  | `          |\n|-----|-------------------------------|--------------------|------------|\n| A . | Savings (Benefit) to the firm |                    |            |\n|     | Cost of Credit administration | ` 1,40,000         | ` 1,40,000 |\n|     | Cost of bad-debt losses       | (0.02 \u00d7 360 lakhs) | ` 7,20,000 |\n|     | Total                         |                    | ` 8,60,000 |\n\na\n\na\n\n| B.   | Cost to the Firm:                                                                     |                  |            |\n|------|---------------------------------------------------------------------------------------|------------------|------------|\n|      | Factoring Commission [Annual credit Sales \u00d7 % of Commission (or calculated annually)] | ` 360 30,000\u00d7 30 | ` 3,60,000 |\n|      | Interest Charges                                                                      | ` 360 33,375\u00d7 30 | ` 4,00,500 |\n|      | Total                                                                                 |                  | ` 7,60,500 |\n| C.   | Net Benefits to the Firm: (A-B)                                                       |                  | ` 99,500   |\n\nAdvice: Since the savings to the firm exceeds the cost to the firm on account of factoring, therefore, the proposal is acceptable."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Meaning of Forfaiting\n\n'Forfait'  is  a  French  term  which  means  'relinquish  a  right'.  Forfaiting  is  an arrangement of bill discounting in which a financial institution or bank buys the trade bills (invoices) or trade receivables from exporters of goods or services, where the  exporter  relinquish  his  right  to  receive  payment  from  importer.  Financial Institutions  or  banks  provides  immediate  finance  to  exporter  'without  recourse' basis in which risk and rewards related with the bills/ receivables transferred to the financial  institutions/  banks.  It  is  a  unique  credit  facility  arrangement  where  an overseas  buyer  (importer)  can  open  a  \"letter  of  credit\"  (or  other  negotiable instruments)  in  favour  of  the  exporter and  can  import  goods  and  services  on deferred payment terms."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Functions of Forfaiting\n\nThe functionality can be understood in the following manner:\n\n- (i) Exporter sells goods or services to an overseas buyer.\n- (ii) The  overseas  buyers  i.e.  the  importer  on  the  basis  trade  bills  and  import documents draws a letter of credit (or other negotiable instruments) through its bank (known as importer's bank)."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## MANAGEMENT OF WORKING CAPITAL\n\na\n\n- (iii) The exporter on receiving the letter of credit (or other negotiable instruments) approaches to its bank (known as exporter's bank).\n- (iv) The exporter's bank buys the letter of credit (or other negotiable instruments) 'without recourse basis' and provides the exporter the payment for the bill.\n\n<!-- image -->"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Features of Forfaiting\n\nThe Salient features of forfaiting are:\n\n- It motivates exporters to explore new geographies as payment is assured.\n- An overseas  buyer  (importer)  can  import  goods  and  services  on deferred payment terms .\n- The  exporter  enjoys reduced  transaction  costs  and  complexities of international trade transactions.\n- The exporter gets to compete in the international market and can continue to put his working capital to good use to scale up operations.\n- While  importers  avail of forfaiting facility from  international financial institutions in order to finance their imports at competitive rates ."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Example of Forfaiting:\n\nExim Bank of India's 'Buyer's Credit' is an example of forfaiting arrangement. Buyer's Credit  programme  facilitates  exports  for  SMEs  by  providing  credit  to  overseas buyer  to  import  goods  from  India.  It  is  offering  financing  of  capital  goods  or services on deferred payment terms and provides non-recourse finance to Indian\n\na"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## FINANCIAL MANAGEMENT\n\nexporters  by  converting  deferred  credit  contract  into  cash  contract.  It  extends advance payments to Indian exporters on behalf of the overseas buyer.\n\nThe following is a diagrammatic illustration of Exim's Buyer's Credit:\n\n<!-- image -->\n\n(Source: https://www.eximbankindia.in/buyers-credit)\n\n<!-- image -->\n\na"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 21.  INNOVATIONS IN RECEIVABLE MANAGEMENT\n\nDuring the recent years, a number of tools, techniques, practices and measures have been invented to increase effectiveness in accounts receivable management.\n\nFollowing  are  the  major  determinants  for  significant  innovations  in  accounts receivable management and process efficiency.\n\n1. Re-engineering Receivable Process: In some of the organizations real cost reductions  and  performance  improvements  have  been  achieved  by  reengineering in accounts receivable process.  Re-engineering is a fundamental re-think  and  re-design  of  business  processes  by  incorporating  modern business approaches. The nature of accounts receivables is such that decisions made elsewhere in the organization are likely to affect the level of resources that are expended on the management of accounts receivables.\n\nThe following aspects provide an opportunity to improve the management of accounts receivables:\n\n- (a) Centralisation: Centralisation of high nature transactions of accounts receivables and payable is one of the practices for better efficiency.  This focuses attention on specialized groups for speedy recovery.\n- (b) Alternative  Payment  Strategies: Alternative  payment  strategies  in addition to traditional practices result into efficiencies in the management of accounts receivables.  It is observed that payment of accounts outstanding is likely to be quicker where a number of payment alternatives are made available to customers.  Besides, this convenient payment method is a marketing tool that is of benefit in attracting and retaining customers.  The following alternative modes of payment may also be used along with traditional methods like Cheque Book etc., for making timely payment, added customer service, reducing remittance processing costs and improved cash flows and better debtor turnover.\n- (i) Direct debit: I.e., authorization for the transfer of funds from the purchaser's bank account.\n- (ii) Integrated  Voice  Response  (IVR) : This  system  uses  human operators  and  a  computer-based  system  to  allow  customers  to\n\na\n\nmake  payment  over  phone.    This  system  has  proved  to  be beneficial  in  the  organisations  processing  a  large  number  of payments regularly.\n\n- (iii) Collection by a third party : The payment can be collected by an authorized  external  firm.    The  payments  can  be  made  by  cash, cheque, credit card or Electronic fund transfer.  Banks may also be acting as collecting agents  of their  customers  and  directly depositing the collections in cu stomers' bank accounts.\n- (iv) Lock Box Processing: Under this system an outsourced partner captures cheques and invoice data and transmits the file to the client firm for processing in that firm's systems.\n- (v) Payments via Internet using fund transfer methods like RTGS, NEFT, IPMS UPIs, App based payment like Paytm, Phone Pe, etc.\n- (c) Customer  Orientation: Where  individual  customers  or  a  group  of customers  have  some  strategic  importance  to  the  firm  a  case  study approach  may  be  followed  to  develop  good  customer  relations.    A critical  study  of  this  group  may  lead  to  formation  of  a  strategy  for prompt settlement of debt.\n2. Evaluation of Risk: Risk evaluation is a major component in the establishment  of  an  effective  control  mechanism.  Once  risks  have  been properly assessed controls can be introduced to either contain the risk to an acceptable  level  or  to  eliminate  them  entirely.    This  also  provides  an opportunity  for  removing  inefficient  practices.    This  involves  a  re-think  of processes and questioning the way that tasks are performed.  This also opens the  way  for  efficiency  and  effectiveness  benefits  in  the  management  of accounts receivables.\n3. Use of Latest Technology: Technological developments now-a-days provides  an  opportunity  for  improvement  in  accounts  receivables  process. The major innovations available are the integration of systems used in the management  of  accounts  receivables,  the  automation  and  the  use  of  ecommerce.\n\na\n\n- (a) E-commerce refers to the use of computer and electronic telecommunication technologies, particularly on an interorganisational level, to support trading in goods and services. It uses technologies such as Electronic Data Inter-change (EDI), Electronic Mail, Electronic  Funds  Transfer  (EFT)  and  Electronic  Catalogue  Systems  to allow  the  buyer  and  seller  to  transact  business  by  exchange  of information between computer application systems such as Amazon, Flipkart etc.\n- (b) Automated  Accounts  Receivable  Management  Systems :  Now-adays all the big companies develop and maintain automated receivable management systems.  Manual systems of recording the transactions and  managing  receivables  are  not  only  cumbersome  but  ultimately costly  also.    These  integrated  systems  automatically  update  all  the accounting  records  affected  by  a  transaction.    For  example,  if  a transaction of credit sale is to be recorded, the system increases the amount the customer owes to the firm, reduces the inventory for the item purchased, and records the sale.  This system of a company allows the application and tracking of receivables and collections, using the automated receivables system allows the company to store important information  for  an  unlimited  number  of  customers  and  transactions, and  accommodate  efficient  processing  of  customer  payments  and adjustments.\n4. Receivable Collection Practices: The aim of debtors' collection should be to reduce,  monitor  and  control  the  accounts  receivable  at  the  same  time maintain  customer  goodwill.    The  fundamental  rule  of  sound  receivable management  should  be  to  reduce  the  time  lag  between  the  sale  and collection.    Any  delays  that  lengthen  this  span  causes  receivables  to unnecessary build up and increase the risk of bad debts. This is equally true for the delays caused by billing and collection procedures as it is for delays caused by the customer.\n\nThe following are major receivable collection procedures and practices:\n\n- (i) Issue of Invoice.\n- (ii) Open account or open-end credit.\n\na\n\n- (iii) Credit terms or time limits.\n- (iv) Periodic statements and follow ups.\n- (v) Use of payment incentives and penalties.\n- (vi) Record keeping and Continuous Audit.\n- (vii) Export Factoring:  Factors provide comprehensive credit management, loss protection collection services and provision of working capital to the firms exporting internationally.\n- (viii)  Business Process Outsourcing:  This refers to a strategic business tool whereby  an  outside  agency  takes  over  the  entire  responsibility  for managing a business process like collections in this case.\n5. Use of Financial tools/techniques: The  finance  manager while managing accounts receivables uses a number of financial tools and techniques. Some of them have been described hereby as follows:\n- (i) Credit  analysis: While determining the credit terms,  the firm  has  to evaluate individual customers in respect of their credit worthiness and the possibility of bad debts.  For this purpose, the firm has to ascertain credit rating of prospective customers.\n\nCredit rating: An important task for the finance manager is to rate the various  debtors  who  seek  credit  facility.    This  involves  decisions regarding individual parties so as to ascertain how much credit can be extended and for how long.  In foreign countries specialized agencies are  engaged  in  the  task  of  providing  rating  information  regarding individual parties.  Dun and Broad street is one such source.\n\nThe finance manager has to look into the credit-worthiness of a party and  sanction  credit  limit  only  after  he  is  convinced  that  the  party  is sound.  This would involve an analysis of the financial status of the party, its reputation and previous record of meeting commitments.\n\nThe credit manager here has to employ a number of sources to obtain credit information.  The following are the important sources:"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## MANAGEMENT OF WORKING CAPITAL\n\na\n\nTrade references; Bank references; Credit bureau reports; Past experience;  Published  financial  statements;  and  Salesman's  interview and reports.\n\nOnce the credit-worthiness of a client is ascertained, the next question is to set a limit of the credit. This credit limit once set can be further enhanced as the favorable experience is gained while dealing with that client.  In all such enquiries, the credit manager must be discreet and should always have the interest of high sales in view at the same time balancing any risk of non-collection.\n\n- (ii) Credit  Granting  -  Decision  tree  analysis: The  decision  whether  to grant credit or not is a decision involving costs and benefits.  When a customer  pays,  the  seller  makes  profit  but  when  he  fails  to  pay  the amount  of  cost  going  into  the  product  is  also  gone.    If  the  relative chances of recovering the dues can be decided, it can form a probability distribution of payment or non-payment.  If the chances of recovery are 9 out of 10 then probability of recovery is 0.9 and that of default is 0.1.\n\nCredit evaluation of a customer shows that the probability of recovery is 0.9 and that of default is 0.1, the revenue from the order is ` 5 lakhs and cost is ` 4 lakhs.  The decision is whether credit should be granted or not.\n\nThe analysis is presented in the following diagram.\n\n<!-- image -->\n\nThe weighted net benefit is ` [1,00,000 \u00d7 0.9 i.e. 90,000 -0.1 \u00d7 4,00,000 i.e. 40,000] = 50,000.  So, credit should be granted.\n\n- (iii) Control of receivables: Another aspect of management of debtors is the control of receivables.  Merely setting of standards and framing a credit policy\n\na\n\nis  not  sufficient;  it  is,  equally  important  to  control  receivables  by  constant monitoring and follow ups.\n\n- (iv) Collection policy: Efficient and timely collection of debtors ensures that the bad  debt  losses  are  reduced  to  the  minimum  and  the  average  collection period is shorter.  If a firm spends more resources on collection of debts, it is likely to have smaller bad debts.  Thus, a firm must work out the optimum amount that it should spend on collection of debtors.  This involves a tradeoff between the level of expenditure on the one hand and decrease in bad debt losses and investment in debtors on the other.\n\nThe collection cell of a firm has to work in a manner that it does not create too much resentment amongst the customers.  On the other hand, it has to keep the amount of the outstanding in check.  Hence, it has to work in a very smoothen manner and diplomatically.\n\nIt  is  important that clear-cut procedures regarding credit collection are set up. Such procedures must answer questions like the following:\n\n- (a) How long should a debtor balance be allowed to exist before collection process is started?\n- (b) What should be the procedure of follow up with defaulting customer? How reminders are to be sent and how should and at what frequency, each successive reminder be drafted?\n- (c) Should  there  be  collection  machinery  whereby  personal  calls  by company's representatives are made?\n- (d) What should be the procedure for dealing with doubtful accounts?  Is legal action to be instituted or some escalation matrix to be followed ? How should account be handled?"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 22.  MONITORING OF RECEIVABLES\n\nConstant monitoring of the current status of receivables is very essential for any organization  to  make  sure  that  its  receivables  management  is  as  effective  as  it should be. Various steps that constitute constant monitoring are:\n\n- (i) Computation of average age of receivables: It involves computation of average collection period."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## MANAGEMENT OF WORKING CAPITAL\n\na\n\n- (ii) Ageing Schedule: When receivables are analysed according to their age , the process is known as preparing the ageing schedules of receivables.  The computation of average age of receivables is a quick and effective method of comparing the liquidity of receivables with the liquidity of receivables in the past and also comparing liquidity of one firm with the liquidity of the other competitive  firm.    It  also  helps  the  firm  to  predict  collection  pattern  of receivables in future.  This comparison can be made periodically.\n\nThe  purpose  of  classifying  receivables  by  age  groups  is  to  have  a  closer control over the quality of individual accounts.  It requires going back to the receivables'  ledger  where  the  dates  of  each  customer's  purchases  and payments are available.  The ageing schedule, by indicating a tendency for old  accounts  to  accumulate,  provides  a  useful  supplement  to  average collection  period  of  receivables/sales  analysis.    Because  an  analysis  of receivables in terms of associated dates of sales enables the firm to recognise the  recent  increases,  and  slumps  in  sales.    To  ascertain  the  condition  of receivables for control purposes, it may be considered desirable to compare the current ageing schedule with an earlier ageing schedule in the same firm and also to compare this information with the experience of other firms.  The following is an illustration of the ageing schedule of receivables:-"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Ageing Schedule\n\n| Age Classes (Days)   | As on 30 th June, 2022   | As on 30 th June, 2022   | As on 30 th June, 2022   | As on 30 th September, 2022   | As on 30 th September, 2022   | As on 30 th September, 2022   |\n|----------------------|--------------------------|--------------------------|--------------------------|-------------------------------|-------------------------------|-------------------------------|\n| Age Classes (Days)   | Month of Sale            | Balance of Receivables   | Percentage to total      | Month of Sale                 | Balance of Receivables        | Percentage to total           |\n| Age Classes (Days)   |                          | ( ` )                    |                          |                               | ( ` )                         |                               |\n| 1-30                 | June                     | 41,500                   | 11.9                     | September                     | 1,00,000                      | 22.7                          |\n| 31-60                | May                      | 74,200                   | 21.4                     | August                        | 2,50,000                      | 56.8                          |\n| 61-90                | April                    | 1,85,600                 | 53.4                     | July                          | 48,000                        | 10.9                          |\n| 91-120               | March                    | 35,300                   | 10.2                     | June                          | 40,000                        | 9.1                           |\n| 121 and more         | Earlier                  | 10,800                   | 3.1                      | Earlier                       | 2,000                         | 0.5                           |\n|                      |                          | 3,47,400                 | 100                      |                               | 4,40,000                      | 100                           |\n\na\n\nThe above ageing schedule shows a substantial improvement in the liquidity of receivables for the quarter ending September, 2022 as compared with the liquidity of receivables for the quarter ending June, 2022.  It could be possible due to greater collection efforts of the firm."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## (iii) Debt Collection Programme:\n\n- (a) Monitoring the state of receivables.\n- (b) Intimation to customers when due date approaches.\n- (c) E-mail and telephonic advice to customers on the due date.\n- (d) Reminding the  legal  recourse  on  overdue  A/cs  and  follow  escalation matrix if available.\n- (e) Legal action on overdue A/cs.\n\nThe following diagram shows the relationship  between collection expenses and  bad  debt  losses  which  have  to  be  established  as  initial  increase  in collection expenses may have only a small impact on bad debt losses.\n\n<!-- image -->"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## ILLUSTRATION 16\n\nMosaic Limited has current sales of ` 15 lakhs per year.  Cost of sales is 75 per cent of sales and bad debts are one per cent of sales.  Cost of sales comprises 80 per cent variable costs and 20 per cent fixed costs, while the company's required rate of return is 12 per cent.    Mosaic  Limited currently  allows  customers  30  days'  credit,  but  is  considering increasing this to 60 days' credit in order to increase sales."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## MANAGEMENT OF WORKING CAPITAL\n\na\n\nIt has been estimated that this change in policy will increase sales by 15 per cent, while bad debts will increase from one per cent to four per cent.  It is not expected that the policy change will result in an increase in fixed costs and creditors and stock will be unchanged. Should Mosaic Limited introduce the proposed policy? ANALYSE (Assume a 360 days year)"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_4_Management_of_Receivables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## SOLUTION\n\nNew level of sales will be 15,00,000 \uf0b4 1.15 = ` 17,25,000\n\nVariable costs are 80% \uf0b4 75% = 60% of sales\n\nContribution from sales is therefore 40% of sales\n\nFixed Cost are 20% \u00d7 75% = 15% of sales\n\n| Particulars                                                                                                                            | `      | `        |\n|----------------------------------------------------------------------------------------------------------------------------------------|--------|----------|\n| Proposed investment in debtors = Variable Cost + Fixed Cost* = (17,25,000 \u00d7 60%) + (15,00,000 \u00d7 15%) = (10,35,000 + 2,25,000) \u00d7 60 360 |        | 2,10,000 |\n| Current investment in debtors = [(15,00,000 \uf0b4 60%) + (15,00,000 \u00d7 15%)] \u00d7 30 360                                                       |        | 93,750   |\n| Increase in investment in debtors                                                                                                      |        | 1,16,250 |\n| Increase in contribution = 15% \uf0b4 15,00,000 \uf0b4 40%                                                                                       |        | 90,000   |\n| New level of bad debts = (17,25,000 \uf0b4 4% )                                                                                             | 69,000 |          |\n| Current level of bad debts (15,00,000 \u00d7 1%)                                                                                            | 15,000 |          |\n| Increase in bad debts                                                                                                                  |        | (54,000) |\n| Additional financing costs = 1,16,250 \uf0b4 12% =                                                                                          |        | (13,950) |\n| Savings by introducing change in policy                                                                                                |        | 22,050   |"}]

vector_db_v2/raw_json_backups/Inter_P6A_FM_Mod2_Chapter_9_Unit_5_Management_of_Payables.json

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+[{"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_5_Management_of_Payables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 23.  INTRODUCTION\n\nThere is an old age saying in business that if you can buy well then you can sell well.  Management  of  your  creditors  and  suppliers  is  just  as  important  as  the management of your debtors.\n\nTrade creditor is a spontaneous / short term source of finance in the sense that it arises from ordinary business transaction. But it is also important to look after your creditors - slow payment by you may create ill-feeling and your supplies could be disrupted and also create a bad image for your company.\n\nCreditors are a vital part of effective cash management and should be managed carefully to enhance the cash position."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_5_Management_of_Payables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## (a) Cost of Availing Trade Credit\n\nNormally  it  is  considered  that  the  trade  credit  does  not  carry  any  cost. However, it carries the following costs:\n\n- (i) Price: There  is  often  a  discount  on the  price that the firm  undergoes when it uses trade credit, since it can take advantage of the discount only  if  it  pays  immediately.  This  discount  can  translate  into  a  high implicit cost.\n- (ii) Loss of goodwill: If the credit is overstepped, suppliers may discriminate against delinquent customers if supplies become short. As with  the  effect  of  any  loss  of  goodwill,  it  depends  very  much  on  the relative market strengths of the parties involved.\n- (iii) Cost  of  managing: Management  of  creditors  involves  administrative and accounting costs that would otherwise be incurred.\n- (iv) Conditions: Sometimes most of the suppliers insist that for availing the credit facility the order should be of some minimum size or even on regular basis.\n\nWhere,\n\nd = Size of discount i.e. for 6% discount,  d = 6\n\nt  =   The reduction in the payment period in days, necessary to obtain the early discount or Days Credit Outstanding -Discount Period."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_5_Management_of_Payables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## (b) Cost of Not Taking Trade Credit\n\nOn the other hand, the costs of not availing credit facilities are as under:\n\n- (i) Impact of Inflation: If inflation persists then the borrowers are favored over the lenders as they were better off to pay the fixed outstanding amount later than sooner. Also, the subsequent transactions shall be at higher prices.\n- (ii) Interest: Trade credit is a type of interest free loan, therefore failure to avail  this  facility  has  an  interest  cost.  This  cost  is  further  increased  if interest rates are higher.\n- (iii) Inconvenience: Sometimes  it  may  also  cause  inconvenience  to  the supplier if the supplier is geared to the deferred payment.\n\n<!-- image -->"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_5_Management_of_Payables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 25.  COMPUTATION OF COST OF PAYABLES\n\nBy  using  the  trade  credit  judiciously,  a  firm  can  reduce  the  effect  of  growth  or burden on investments in Working Capital.\n\nNow question arises how to calculate the cost of not taking the discount.\n\nThe following equation can be used to calculate nominal cost, on an annual basis of not taking the discount:\n\n<!-- formula-not-decoded -->\n\nHowever, the above formula does not take into account the compounding effect and therefore, the cost of credit shall be even higher. The cost of lost cash discount can be estimated by the formula:\n\n<!-- formula-not-decoded -->\n\na"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_5_Management_of_Payables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## ILLUSTRATION 17\n\nSuppose ABC Ltd. has been offered credit terms from its major supplier of 2/10, net 45. Hence the company has the choice of paying ` 10 per ` 100 or to invest ` 98 for an additional 35 days and eventually pay the supplier ` 100 per ` 100. The decision as to whether the discount should be accepted depends on the opportunity cost of investing ` 98 for 35 days. ANALYSE what should the company do?"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_5_Management_of_Payables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## SOLUTION\n\nIf the company does not avail the cash discount and pays the amount after 45 days, the implied cost of interest per annum would be approximately:\n\n<!-- formula-not-decoded -->\n\nNow let us assume that ABC Ltd. can invest the additional cash and can obtain an annual return of 25% and if the amount of invoice is ` 10,000. The alternatives are as follows:\n\n|                                                                               | Refuse discount   | Accept discount   |\n|-------------------------------------------------------------------------------|-------------------|-------------------|\n| Payment to supplier                                                           | 10,000            | 9,800             |\n| Return from investing ` 9,800 between day 10 and day 45: ` 35 \u00d7 9,800\u00d725% 365 | (235)             |                   |\n| Net Cost                                                                      | 9,765             | 9,800             |\n\nAdvise: Thus, it is better for the company to refuse the discount, as return on cash retained is more than the saving on account of discount."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_5_Management_of_Payables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## ILLUSTRATION 18\n\nThe Dolce Company purchases raw materials on terms of 2/10, net 30.  A review of the company's records by the owner, Mr. Gautam, revealed that payments are usually made 15 days after purchases are made.  When asked why the firm did not take advantage of its discounts, the accountant, Mr. Rohit, replied that it cost only 2 per cent for these funds, whereas a bank loan would cost the company 12 per cent.\n\na"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_5_Management_of_Payables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## MANAGEMENT OF WORKING CAPITAL\n\n- (a) ANALYSE what mistake is Rohit making?\n- (b) If the firm could not borrow from the bank and was forced to resort to the use of trade credit funds, what suggestion might be made to Rohit that would reduce the annual interest cost? IDENTIFY."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_5_Management_of_Payables.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## SOLUTION\n\n- (a) Rohit's argument of comparing 2% discount with 12% bank loan rate is not rational as 2% discount can be earned by making payment 5 days in advance i.e. within 10 days rather 15 days as payments are made presently. Whereas 12% bank loan rate is for a year.\n\nAssume  that  the  purchase  value  is ` 100,  the  discount  can  be  earned  by making payment within 10 days is ` 2, therefore, net payment would be ` 98 only. Annualized benefit\n\n<!-- formula-not-decoded -->\n\nThis means cost of not taking cash discount is 149%.\n\n- (b) If the bank loan facility could not be available, then in this case the company should resort to utilise maximum credit period as possible.\n\nTherefore, payment should be made in 30 days to reduce the interest cost.\n\na"}]

vector_db_v2/raw_json_backups/Inter_P6A_FM_Mod2_Chapter_9_Unit_6_Financing_of_WC.json

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+[{"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_6_Financing_of_WC.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 26.  INTRODUCTION\n\nAfter determining the amount of working capital required, the next step to be taken by the finance manager is to arrange the funds.\n\nAs discussed earlier, it is advisable that the finance manager bifurcate the working capital  requirements  between  the  permanent  working  capital  and  temporary working capital.\n\nThe permanent working capital is always needed irrespective of sales fluctuation; hence it should be financed by the long-term sources such as debt and equity.  On the  contrary  the  temporary  working  capital  may  be  financed  by  the  short-term sources of finance.\n\nBroadly speaking, the working capital finance may be classified between the two categories:\n\n- (i) Spontaneous sources; and\n- (ii) Negotiable sources.\n\nSpontaneous Sources: Spontaneous sources of finance are those which naturally arise in the course of business operations.  Trade credit, credit from employees, credit  from  suppliers  of  services,  etc.  are  some  of  the  examples  which  may  be quoted in this respect.\n\nNegotiated  Sources: On  the  other  hand,  the  negotiated  sources,  as  the  name implies,  are  those  which  have  to  be  specifically  negotiated  with  lenders  say, commercial banks, financial institutions, general public etc.\n\nThe finance manager has to be very careful while selecting a particular source, or a combination  thereof  for  financing  of  working  capital.    Generally,  the  following parameters will guide his decisions in this respect:\n\n- (i) Cost factor\n- (ii) Impact on credit rating\n\n- (iii) Feasibility\n- (iv) Reliability\n- (v) Restrictions\n- (vi) Hedging approach or  matching  approach  i.e.,  Financing  of  assets  with  the same maturity as of assets."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_6_Financing_of_WC.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 27.1 Spontaneous Sources of Finance\n\n- (a) Trade  Credit: As  outlined  above  trade  credit  is  a  spontaneous  source  of finance which is normally extended to the purchaser organization by the sellers or services providers.  This source of financing working capital is more important since it  contributes  to  about  one-third  of  the  total  short-term  requirements.    The dependence on this source is higher due to lesser cost of finance as compared with other  sources.    Trade  credit  is  guaranteed  when  a  company  acquires  supplies, merchandise or materials and does not pay immediately.  If a buyer is able to get the credit without completing much formality, it is termed as 'open account trade credit.'\n- (b) Bills Payable: On the other hand, in the case of 'Bills Payable' the purchaser will have to give a written promise to pay the amount of the bill/invoice either on demand or at a fixed future date to the seller or the bearer of the note.\n\nDue to its simplicity, easy availability and lesser explicit cost, the dependence on this  source  is  much  more  in  all  small  or  big  organizations.    Especially,  for  small enterprises this form of credit is more helpful to small and medium enterprises. The  amount  of  such  financing  depends  on  the  volume  of  purchases  and  the payment timing.\n\n- (c) Accrued Expenses: Another spontaneous source of short-term financing is the accrued expenses or the outstanding expenses liabilities.  The accrued expenses refer to the services availed by the firm, but the payment for which has yet to be made.  It is a built in and an automatic source of finance as most of the services like wages, salaries, taxes, duties etc., are paid at the end of the period.  The accrued\n\na\n\na\n\nexpenses represent an interest free source of finance.  There is no explicit or implicit cost  associated  with  the  accrued  expenses  and  the  firm  can  ensure  liquidity  by accruing these expenses."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_6_Financing_of_WC.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 27.2 Inter-corporate Loans and Deposits\n\nSometimes, organizations having surplus funds invest for short-term period with other organizations.  The rate of interest will be higher than the bank rate of interest and depends on the financial soundness of the borrower company.  This source of finance reduces dependence on bank financing."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_6_Financing_of_WC.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 27.3 Commercial Papers\n\nCommercial Paper (CP) is an unsecured promissory note issued by a firm to raise funds for a short period.  This is an instrument that enables highly rated corporate borrowers for short-term borrowings and provides an additional financial instrument to investors with a freely negotiable interest rate.  The maturity period ranges from minimum 7 days to less than 1 year from the date of issue.  CP can be issued in denomination of ` 5 lakhs or multiples thereof.\n\nAdvantages of CP: From the point of the issuing company, CP provides the following benefits:\n\n- (a) CP  is  sold  on  an  unsecured  basis  and  does  not  contain  any  restrictive conditions.\n- (b) Maturing  CP  can  be  repaid  by  selling  new  CP  and  thus  can  provide  a continuous source of funds.\n- (c) Maturity of CP can be tailored to suit the requirement of the issuing firm.\n- (d) CP can be issued as a source of fund even when money market is tight.\n- (e) Generally,  the  cost  of  CP  to  the  issuing  firm  is  lower  than  the  cost  of commercial bank loans.\n\nHowever, CP as a source of financing has its own limitations:\n\n- (i) Only highly credit  rating  firms  can  use  it.    New  and  moderately  rated  firm generally are not in a position to issue CP.\n\na\n\n- (ii) CP can neither be redeemed before maturity nor can be extended beyond maturity."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_6_Financing_of_WC.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 27.4 Funds Generated from Operations\n\nFunds generated from operations, during an accounting period, increase working capital by an equivalent amount.  The two main components of funds generated from operations are profit and depreciation.  Working capital will increase by the extent  of  funds  generated  from  operations.    Students  may  refer  to  funds  flow statement given earlier in this chapter."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_6_Financing_of_WC.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 27.6 Bills Discounting\n\nBill discounting is recognized as an important short-term Financial Instrument and it is widely used method of short-term financing.  In a process of bill discounting, the supplier of goods draws a bill of exchange with direction to the buyer to pay a certain amount of money after a certain period, and gets its acceptance from the buyer or drawee of the bill."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_6_Financing_of_WC.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 27.7 Bill Rediscounting Scheme\n\nThe Bill rediscounting Scheme was introduced by Reserve Bank of India with effect from 1 st  November, 1970 in order to extend the use of the bill of exchange as an instrument for providing credit and the creation of a bill market in India with a facility for the rediscounting of eligible bills by banks.  Under the bills rediscounting scheme, all licensed scheduled banks are eligible to offer bills of exchange to the Reserve Bank for rediscount."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_6_Financing_of_WC.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 27.8 Factoring\n\nStudents may refer to the unit on Receivable Management wherein the concept of factoring has been discussed.  Factoring is a method of financing whereby a firm\n\na\n\nsells its trade debts at a discount to a financial institution.  In other words, factoring is a continuous arrangement between a financial institution, (namely the factor) and a  firm  (namely  the client) which sells goods and services to trade customers on credit.    As  per  this  arrangement,  the  factor  purchases  the  client's  trade  debts including accounts receivables either with or without recourse to the client, and thus, exercises control over the credit extended to the customers and administers the sales le dger of his client.  To put it in a layman's language, a factor is an agent who collects the dues of his client for a certain fee.\n\nThe differences between Factoring and Bills discounting are as follows:\n\n- (i) Factoring is called as 'Invoice factoring' whereas bills discounting is known as 'Invoice discounting'.\n- (ii) In factoring the parties are known as client, factor and debtor whereas in bills discounting they are known as Drawer, Drawee and Payee.\n- (iii) Factoring is a sort of management of book debts whereas bills discounting is a sort of borrowing from commercial banks.\n- (iv) For factoring there is no specific Act; whereas in the case of bills discounting, the Negotiable Instrument Act is applicable.\n\n<!-- image -->"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_6_Financing_of_WC.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 28.  WORKING CAPITAL FINANCE FROM BANKS\n\nBanks in India today constitute the major suppliers of working capital credit to any business  activity.    Recently,  some  term  lending  financial  institutions  have  also announced  schemes  for  working  capital  financing.    The  two  committees  viz., Tandon Committee and Chore Committee have evolved definite  guidelines and parameters  in  working  capital  financing,  which  have  laid  the  foundations  for development and innovation in the area."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_6_Financing_of_WC.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## Assessment of Working Capital\n\n- Reserve Bank of India has withdrawn the prescription, in regard to assessment of working capital needs, based on the concept of Maximum Permissible Bank Finance (MPBF), in April 1997.  Banks are now free to evolve, with the approval\n\na\n\nof their Boards, methods for assessing the working capital requirements of borrowers, within the prudential guidelines and exposure norms prescribed. Banks, however, have to take into account Reserve Bank's instructions relating to  directed  credit  (such  as  priority  sector,  export,  etc.),  and  prohibition  of credit  (such  as  bridge  finance,  rediscounting  of  bills  earlier  discounted  by NBFCs) while formulating their lending policies.\n\n- With the above liberalizations, all the instructions relating to MPBF issued by RBI from time to time stand withdrawn. Further, various instructions/guidelines  issued  to  banks  with  objective  of  ensuring  lending discipline in appraisal, sanction, monitoring and utilization of bank finance cease to be mandatory.  However, banks have the option of incorporating such  of  the  instructions/guidelines  as  are  considered  necessary  in  their lending policies/procedures."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_6_Financing_of_WC.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## 29.  FORMS OF BANK CREDIT\n\nThe bank credit will generally be in the following forms:\n\n- Cash Credit: This facility will be given by the banker to the customers by giving certain amount of credit facility on continuous basis.  The borrower will not be allowed to exceed the limits sanctioned by the bank.\n- Bank Overdraft: It is a short-term borrowing facility made available to the companies in case of urgent need of funds.  The banks will impose limits on the amount they can lend.  When the borrowed funds are no longer required they can quickly and easily be repaid.  The banks issue overdrafts with a right to call them in at short notice.\n- Bills Discounting: The Company which sells goods on credit will normally draw a bill on the buyer who will accept it and sends it to the seller of goods. The seller, in turn discounts the bill with his banker.  The banker will generally earmark the discounting bill limit.\n- Bills  Acceptance: To  obtain  finance  under  this  type  of  arrangement  a company draws a bill of exchange on bank.  The bank accepts the bill thereby promising to pay out the amount of the bill at some specified future date.\n\na"}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_6_Financing_of_WC.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## FINANCIAL MANAGEMENT\n\n- Line of Credit: Line of Credit is a commitment by a bank to lend a certain amount of funds on demand specifying the maximum amount.\n- Letter  of  Credit: It  is  an  arrangement  by  which  the  issuing  bank  on  the instructions of a customer or on its own behalf undertakes to pay or accept or  negotiate  or  authorizes  another  bank  to  do  so  against  stipulated documents subject to compliance with specified terms and conditions.\n- Bank Guarantees: Bank guarantee is one of the facilities that the commercial banks extend on behalf of their clients in favour of third parties who will be the beneficiaries of the guarantees."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_6_Financing_of_WC.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## SUMMARY\n\n- \uf0a8 Working Capital Management involves managing the balance between firm's short-term assets and its short-term liabilities.\n- \uf0a8 From  the  value  point  of  view,  Working  Capital  can  be  defined  as  Gross Working Capital or Net Working Capital.\n- \uf0a8 From the point of view of time, the term working capital can be divided into two categories viz., Permanent and temporary.\n- \uf0a8 A large amount of working capital would mean that the company has idle funds.  Since funds have a cost, the company has to pay huge amount as interest on such funds.  If the firm has inadequate working capital, such firm runs the risk of insolvency.\n- \uf0a8 Some of the items/factors which need to be considered while planning for working  capital  requirement  are  nature  of  business,  market  and  demand conditions, operating efficiency, credit policy etc.\n- \uf0a8 Finance manager has to pay particular attention to the levels of current assets and their financing.  To decide the levels and financing of current assets, the risk return trade off must be taken into account.\n- \uf0a8 In determining the optimum level of current assets, the firm should balance the profitability -Solvency tangle by minimizing total costs."}, {"source_file": "Inter_P6A_FM_Mod2_Chapter_9_Unit_6_Financing_of_WC.pdf", "subject": "FM", "doc_type": "Study_Material", "attempt_period": "N/A", "text": "[Concept: Theory]\n## MANAGEMENT OF WORKING CAPITAL\n\na\n\n- \uf0a8 Working  Capital  cycle  indicates  the  length  of  time  between  a  company's paying for materials, entering into stock and receiving the cash from sales of finished goods.  It can be determined by adding the number of days required for each stage in the cycle.\n- \uf0a8 Treasury management is defined as 'the corporate handling of all financial matters,  the  generation  of  external  and  internal  funds  for  business,  the management  of  currencies  and  cash  flows  and  the  complex,  strategies, policies and procedures of corporate finance.\n- \uf0a8 The main objectives of cash management for a business are:-\n- (a) Provide adequate cash to each of its units;\n- (b) No funds are blocked in idle cash; and\n- (c) The surplus cash (if any) should be invested in order to maximize returns for the business.\n- \uf0a8 Large amounts are tied up in sundry debtors, there are chances of bad debts and there will be cost of collection of debts.  On the contrary, if the investment in sundry debtors is low, the sales may be restricted, since the competitors may offer more liberal terms.  Therefore, management of sundry debtors is an important issue and requires proper policies and their implementation.\n- \uf0a8 There are basically three aspects of management of sundry debtors: Credit policy, Credit Analysis and Control of receivables.\n- \uf0a8 Trade creditor is a spontaneous source of finance in the sense that it arises from ordinary business transaction. But it is also important to look after your creditors - slow payment by you may create ill-feeling and your supplies could be disrupted and also create a bad image for your company.\n- \uf0a8 It  is  advisable  that  the  finance  manager  bifurcates  the  working  capital requirements between  the  permanent  working  capital  and  temporary working capital.\n- \uf0a8 The  permanent  working  capital  is  always  needed  irrespective  of  sales fluctuations, hence should be financed by the long-term sources such as debt and equity.  On the contrary the temporary working capital may be financed by the short-term sources of finance.\n\na"}]