Archive | Financial Management

Commercial paper: Commercial paper consists of short term unsecured promissory notes issued by finance companies and certain industrial concerns. Commercial paper can be sold either directly or through dealers. Many large scale companies have found it profitable because of the volume, to sell their papers directly to investors, thus bypassing dealers. Among companies selling papers [...]

Fixed deposits are of two types: –  Banks Fixed Deposits and  Corporate Fixed Deposits Banks Fixed Deposit provides interest at specified rate depending upon the tenure. Banks also provide loan facility, which is known as demand loan to the  investor for which extra interest of 2% is charged in addition to the principle amount. Corporate [...]

Definitions  : F.W.Paish  –“In a modern money using  economy finance may defined  as the provision of money at the time it is wanted .”—- Procurement  View .   John J Hampton—“The term finance can be defined as the management of the flows of money through an organization, whether it will be a corporation , school, [...]

                                 WORKING  CAPITAL  MANAGEMENT Definition : Gerestenberg—“ Circulating capital means current assets of a company that are changed in the ordinary course of business from one form to another,as from cash to inventories, inventories  to receivables and receivables to cash.” [...]

WORKING  CAPITAL   CALCULATION A) Current  Assets 1) Stock  of Raw Material (1mth)  = Annual  Raw mat  X  2/12mth 2) Stock  of  WIP  (1.5 mth) R Mat–Annual  Raw mat  X  1.5/12mth +Labour  — Annual  Labour   X  1.5/12mth   X   1/2 +Expenses — Annual  Expenses  X  1.5/12mth   X   1/2   3) Stock  of  Finished  goods (2.5 mth) = [...]

Working Capital Cycle/Operating Cycle A continuous process starting from payment of cash for purchasing raw material , production , stocking , selling until obtaining money from debtors.   It is a cycle  involving—- conversion of cash into raw material >  conversion of  raw material into WIP > conversion of WIP into Finished goods> conversion of [...]

Steps in Credit Appraisal 1)      Customer Evaluation—Character+Capacity+Capital+Collateral Security+Conditions (economic) 2)      Financial Stmts. of  Customers 3)      Bank references 4)      Trade References 5)      Credit  Bureaus 6)      Bank & Third Party Guarantees 7)      Field Visits   Collection  Methods a) Centralised Collection System b) Decentralised Collection System c) Post dated cheques d) Pay order/bank draft e) Bills of exchange [...]

Control  of   Receivables 1)      Days Sales Outstanding (DSO) DSO= Debtors + Bills Receivable     days Average  Daily  Sales:   2)      Ageing Schedule Debtors are  classified  into different  age brackets.   3)      ABC Analysis Classification  of  Debtors  into A  Category,  B  Category and C  Category A  Category—Small  no. of   debtors  but  of  large  values—Highest Control B  Category— [...]

Credit  Analysis Involves   evaluating  capacity  of  customers  requiring  credit  period. Criteria  of  measuring  creditworthiness  of  prospective  customers  : 1)      Character  of  customer 2)      Capacity to  repay 3)      Capital  / financial   position of  customer 4)      Collateral  Security  provided  by  customer 5)      Conditions  (Economic, Social , competition  etc.)   Opportunity  Cost Opportunity/profit  foregone(givenup) as a result of  [...]

Receivables  include  Debtors  and Bills Receivables. Increase  in  Receivables  ( more credit period) will  lead to increase in sales  and  profits  but  it  will  also lead  to increase in risk of  bad debts.   Receivables  Management—Definition Management  of  debtors and  bills receivables  involves determining the appropriate credit  period extended to debtors  in such a manner [...]