Financial Management

Assignment A
1. Explain why debt is usually considered the cheapest source of financing available?

Answer:-

Company can manage its required funds through debt or equity or combination of both.
Choosing an optimal capital structure different company use different ratio of debt and equity.
But question is how an optimal capital structure can be formed. Basically the capital structure
is formed by considering the financial strength of the company and cost of funds of different
sources.

Many people say that retained earnings is the cheapest source of financing but debt can be
cheapest source of financing from different perspectives. From the shareholders perspective
tax deductibility feature of debt finance is lucrative. And from the lenders perspective debt is
secured because creditors get the preference of getting their principal and interest before
making any benefit to the shareholders.

Tax deductibility feature of debt is the main point, on which we can say debt is the cheapest
source of financing.

There are some other points that may include with deductibility feature. These are

Time value of money and preference of funds.

Dividends not payable to lenders
Interest rate.
Debt is actually the cheaper source of finance for a couple of reasons.
Tax benefit: The firm gets an income tax benefit on the interest component that is paid to the
lender. Dividends to equity holders are not tax deductible.
Limited obligation to lenders: In the event of a firm going bankrupt, which is what happened
with Lehman Brothers, equity holders lose everything. But, debt holders have the first claim
on company assets (collateral), increasing their security. So since debt has limited risk, it is
usually cheaper. Equity holders are taking on more risk, hence they need to be compensated
for it with higher returns.
Limited upside: Since the equity holder has a stake in the business; he can actually participate
in the potential upside in earnings. PE, Venture Capital funds usually buy stakes in high
potential companies at cheap valuations, and since they have a minority stake in the company,
they are entitled to a share of the profits. Plus they can exit after a few years at a fantastic

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premium. On the other hand debt holders have an upside limited to the fixed rate of interest
they receive every year.

2. Differentiate between financial and business risks?

Answer:-

Financial risk refers to a company's ability to manage its debt and financial leverage, while
business risk refers to the company's ability to generate sufficient revenue to cover its
operational expenses. An alternate way of viewing the difference is to see financial risk as the
risk that a company may default on its debt payments, and business risk as the risk that the
company will be unable to function as a profitable enterprise.

Financial Risk
A company's financial risk is related to the company's use of financial leverage and debt
financing, rather than the operational risk of making the company a profitable enterprise.
Financial risk is concerned with a company's ability to generate sufficient cash flow to be
able to make interest payments on financing or meet other debt-related obligations.
Obviously, a company with a relatively higher level of debt financing carries a higher level of
financial risk, since there is a greater possibility of the company not being able to meet its
financial obligations and becoming insolvent.

Some of the factors that may affect a company's financial risk are interest rate changes and
the overall percentage of its debt financing. Companies with greater amounts of equity
financing are in a better position to handle their debt burden. One of the primary financial
risk ratios that analysts and investors consider to determine a company's financial soundness
is the debt/equity ratio, which measures the relative percentage of debt and equity financing.
Foreign currency exchange rate risk is a part of the overall financial risk for companies that
do a substantial amount of business in foreign countries.

Business Risk
Business risk refers to the basic viability of a business, the question of whether a company
will be able to make sufficient sales and generate sufficient revenues to cover its operational
expenses and turn a profit. While financial risk is concerned with the costs of financing,
business risk is concerned with all the other expenses a business must cover to remain
operational and functioning. These expenses include salaries, production costs, facility rent,
and office and administrative expenses. The level of a company's business risk is influenced
by factors such as its cost of goods, profit margins, competition, and the overall level of
demand for the products or services that it sells.

Business risk is often categorized into systematic risk and unsystematic risk. Systematic risk
refers to the general level of risk associated with any business enterprise, the basic risk
resulting from fluctuating economic, political and market conditions. Systematic risk is an
inherent business risk that companies usually have little control over, other than their ability
to anticipate and react to changing conditions. Unsystematic risk, however, refers to the risks
related to the specific business in which a company is engaged. A company can reduce its

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level of unsystematic risk through good management decisions regarding costs, expenses,
investments and marketing. Operating leverage and free cash flow are metrics that investors
use to assess a company's operational efficiency and management of financial resources.

3. Discuss the different approaches of financing of working capital requirements?

Answer:-

Working capital is financed both internally and externally through long-term and short-term
funds, through debt and ownership funds. In financing working capital, the maturity pattern
of sources of finance depended much coincide with credit period of sales for better liquidity.
Generally, it is believed that funds for acquiring the fixed assets should be raised from long
term sources and short-term sources should be utilized for raising working capital. But in the
recent modern enterprises, both the types of sources are utilized for financing both fixed and
current assets. There are mainly 3 approaches to determine financing of working capital. Let
us discuss them one by one:

1) Hedging approach or matching approach: this approach means matching the maturities
of debt with the maturity of financial needs. It means the sources of funds should match with
the nature of assets to be financed. There are two types of working capital permanent and
temporary working capital. The hedging approach suggests that the permanent working
capital requirement should be financed through long term funds, while temporary working
capital should be financed through the short term funds. There is low cost, high risk and high
profit in this approach.

2) Conservative approach: as the name suggests it is a conservative approach which

suggests that the entire requirement of current assets should be financed through long term
sources and short term sources should be used only in case of emergency. There is high cost,
low risk and low profit in this approach.
3) Aggressive approach: as the name suggests it is an aggressive approach which suggests
that the entire requirement of current assets should be financed through short term sources.
There is low cost, high risk and high profit in this approach

4.Describe any two methods of incorporating risk in capital budgeting decisions?

Answer:-

The increasing volatility of the global economy has caused investors to search out safer
investment alternatives. Investors use a capital budget when selecting their investments. A
capital budget is a plan for investing in long-term assets such as buildings and machinery.
Risk is inevitable to these investments. The various risks include cash flows not being paid in
time as agreed, the risk of the investee company collapsing and also the management sinking
the invested funds in risky projects. By incorporating risk in capital budgeting, investors can
minimize losses.

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Risk Premium
Investors try to avoid risk. To encourage investors to invest their funds into risky projects, the
returns from such projects should be higher than returns from less risky investments such as
treasury bonds. A risk premium is a discount rate that is added to the risk-free rate of
borrowing. The risk-free rate is the rate of return of low-risk investments such as
government-backed securities. The investments are then appraised using the resulting
discount rate. Investments that offer better returns are chosen.
Payback Period
The time it takes for a project to pay back the amount of money invested is a matter of
concern to the investor. Investors set a time limit within which they expect to receive returns.
Each project's cash flow is determined. A project whose return falls beyond the time limit will
deemed to be risky.

5. Explain the merits of using market value weights in computing weighted average cost
of capital?

Answer:-
Weighted average cost of capital (WACC) is the average of the minimum after-tax required
rate of return which a company must earn for all of its security holders (i.e. common stock-
holders, preferred stock-holders and debt-holders). It is calculated by finding out cost of each
component of a companys capital structure, multiplying it with the relevant proportion of the
component to total capital and then summing up the proportionate cost of components.
WACC is a very useful tool because it tells whether a particular project is increasing
shareholders wealth or just compensating the cost.

Formula:-For a company which has two sources of finance, namely equity and debt, WACC
is calculated using the following formula:

WACC = r(E) w(E) + r(D) (1 t) w(D)

Cost of equity

In the formula for WACC, r(E) is the cost of equity i.e. the required rate of return on common
stock of the company. It is the minimum rate of return which a company must earn to keep its
common stock price from falling. Cost of equity is estimated using different models, such as
dividend discount model (DDM) and capital asset pricing model (CAPM).

After-tax cost of debt

In the WACC formula, r(D) (1 t) represents the after-tax cost of debt i.e. the after-tax rate
of return which the debt-holders need to earn till the maturity of the debt. Cost of debt of a
company is based on the yield to maturity of the relevant instruments. If no yield to maturity
is available, the cost can be estimated using the instrument's current yield, etc. After-tax cost

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of debt is included in the calculation of WACC because debt offers a tax shield i.e. interest
expense on debt reduces taxes. This reduction in taxes is reflected in reduction in cost of debt
capital.

Weights w(E) is the weight of equity in the companys total capital. It is calculated by
dividing the market value of the companys equity by sum of the market values of equity and
debt. w(D) is the weight of debt component in the companys capital structure. It is calculated
by dividing the market value of the companys debt by sum of the market values of equity
and debt.

Ideally, WACC should be estimated using target capital structure, which is the capital
structure the companys management intends to maintain in the long-run. For practical
purposes, market values are usually used and where the market values are not available, book
values may be used to find out the weight. Weighted average cost of capital is the discount
rate used in calculation of net present value (NPV) and other valuations models such as free
cash flow valuation model. It is the hurdle rate in the capital budgeting decisions. WACC
represents the average risk faced by the organization. It would require an upward adjustment
if it has to be used to calculate NPV of projects which are riskier than the company's average
projects and a downward adjustment in case of less risky projects. Further, WACC is after all
estimation. Different models for calculation of cost of equity may yield different values.
6. Explain any two methods of cash management?

Answer:-
Cash management is the corporate process of collecting and managing cash, as well as using
it for (short-term) investing. It is a key component of ensuring a company's financial stability
and solvency. Corporate treasurers or business managers are frequently responsible for
overall cash management and the related responsibilities to remain solvent.

Monitor your customer balances: It is easy to fall short in the management of your
accounts receivable (money owed to you from customers). Put in to place adequate
pre-qualifying processes before extending credit to customers. Always use a software
system to track who owes you money so that you can follow up with customers and
send invoices and statements. A last resort would be to factor or sell your receivables
to a factoring company to maintain a predictable cash flow. Just keep in mind that
factoring isnt free! There are several new companies out there that will fund your
receivables for a fee check out Fund box and Blue Vine.
Slow down your cash disbursements: Prudent cash flow management dictates that
you retain cash as long as possible. This doesnt mean you become a deadbeat
customer to your own vendors you still have to pay on time, just not too early and
not late. If your vendor offers any sort of early payment discount like a 2% 10, net 30
you will always want to take advantage of the cost savings. You can also try
negotiating extended payment times with your vendors. The longer the cash stays in
your bank account, the better. Try keeping the majority of your idle cash in an

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 interest bearing account when possible as long as the monthly and transaction fees are
not too steep or eating up any interest you might be earning.

7. State with illustration the practical application of time value of money?

Answer:-

Time value of money is the concept that the value of a dollar to be received in future is less
than the value of a dollar on hand today. One reason is that money received today can be
invested thus generating more money. Another reason is that when a person opts to receive a
sum of money in future rather than today, he is effectively lending the money and there are
risks involved in lending such as default risk and inflation. Default risk arises when the
borrower does not pay the money back to the lender. Inflation is the rise in general level of
prices.

Lets use purchasing a home as an example. One of the first decisions in this process is
determining how large of a down payment to make and how much will be financed. Since
there are several factors at play, theres no one-size-fits-all answer.

In some cases, you can obtain a more favourable interest rate by putting more money down.
However, you need to assess the economic component of this decision. Is the potential
savings from a favourable interest rate more than the potential earnings if invested? Would
you have adequate money for emergency expenses? Once this cash goes into a down
payment, that money would have to be loaned against for future use.

This concept can also be useful to those who already have physician mortgage loans. You
might find yourself in a position where you can liquidate your investments and pay off your
home. But, is that the smart thing to do? Economic and asset protection factors may suggest
that maintaining a mortgage makes the most sense, but the emotional toll of debt needs to
also be assessed. Debt impacts us on a psychological level, and if youll sleep better at night
with a house that is paid off in full, then that may be the approach that makes the most sense
for your individual situation.

Time value of money could also influence your strategy for medical school loan repayment. It
may be tempting to pay off these loans in full; however, if the interest rates on your student
loans are favourable it may not be a priority. You could save this money for investment
opportunities or pay off other debts with higher interest rates. Time value of money principle
also applies when comparing the worth of money to be received in future and the worth of
money to be received in further future. In other words, TVM principle says that the value of
given sum of money to be received on a particular date is more than same sum of money to
be received on a later date.

There are many applications of time value of money principle. For example, we can use it to
compare the worth of cash flows occurring at different times in future, to find the present
worth of a series of payments to be received periodically in future, to find the required

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amount of current investment that must be made at a given interest rate to generate a required
future cash flow, etc.

8. Critically explain the factors affecting dividend decisions?

Answer:-

Main factors that influence the dividend decisions are as follows:

The corporate, institutional and legal factors that influence the dividend decision of a firm
include the growth and profitability of the firm its liquidity position, the cost and availability
of alternative forms of financing concerns about the managerial control of the firm, the
existence of external (largely legal) restriction and the impact of inflation of cash
flow.Growth and Profitability:

The amount of growth a firm can sustain and its profitability is related to its dividend
decisions, so long as the firm (because of managerially imposed to external market
constraints) cannot issue additional equity. In fact all the firms that experience above-average
growth rates are expected to have low dividend pay-out ratios since, in line with the residual
theory of dividends, a greater number of profitable investment opportunities should result
(other things being equal in a greater need for earnings retention.

Liquidity:

The liquidity position of a firm is often an important consideration in dividend decisions.

Since dividends represent a cash outflow, it follows that the better the cash position and
overall liquidity of the firm, the greater is the firms ability to pay (and maintain) a cash
dividend.

Legal constraints:

The legal rules act as boundaries within which a company can declare dividends. In general,
cash dividends must be paid from current earnings or from previous earnings that have been
retained by the corporations after providing for depreciation. However, a company may be
permitted to pay dividend in any financial year out of the profits of the company without
providing for depreciation.

Access to the Capital Market:

Another matter for consideration by management in setting an appropriate dividend policy is

the companys ability to obtain cash on relatively short notice. This may be achieved by the
company negotiating for a bank overdraft limit or having access to other short-term sources
of funds.

Inflation:

Inflation must be taken into account when a firm establishes its dividend policy. On the one
hand, investors would like to receive larger cash dividends because of inflation. But from the

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firms viewpoint, inflation causes it to have to invest substantially more to replace existing
equipment, finance new capital expenditures, and meet permanent working capital needs.

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Assignment B
Case Detail:-

Working capitaldo you have enough?

Lending institutions are scrutinizing an operations working capital status as part of the
lending decision. Now more than ever, its time to do a little scrutinizing you. When I hit the
road to speak, one of the most important slides I regularly use highlights how lending criteria
has changed since the financial crisis. To illustrate that point, the slide includes a quote from
Nick Parsons, head of research with the National Australia Bank: "So capitalism has
changedthe owner or the custodian of capital [i.e. lending institutions] is much more
careful about where they use that capital.
To that end, most readers have likely experienced increased scrutiny from their lenders in this
post-crisis world. And one of the key criteria that lenders use to make decisions revolves
around availability of working capital within any operation; working capital being a function
of current assets less current liabilities. Its a measure of an operations buffer to meet its
short-term obligations, hence the importance to lenders.
Perhaps equally important, its a key indicator of cash reserve availability to meet unexpected
emergencies. Thus, it is an important component of risk management to ensure business
continuity within the operation without the need to borrow additional funds. As an example,
albeit simplified, a pickup is typically a critical operational asset for most cow-calf
operations. What if it catches on fire and suddenly needs to be replaced; else the cows dont
get fed? After insurance provides some portion towards replacement, does the operation have
sufficient working capital to meet the remainder of the obligation? This type of assessment
has become more important to lenders since the financial crisis.
This weeks graph highlights USDAs updated aggregate working capital estimates in
agriculture. Clearly, as last weeks illustration depicts, declining revenue has taken a big hit
out of working capital reserves for agriculture. Working capital has declined nearly 50% - the
loss exceeds $82 billion in just three years. Thats a concerning trend and if it continues,
will clearly have implications in the coming years.
What are you doing to maintain strong cash and working capital reserves amidst declining
revenue? What new expectations do you your lenders have during the past several years and
going into 2017? How will you adjust going forward? Leave your thoughts in the comments
section below.

Questions:-

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1. Provide the brief summary of the case in your own words?
Answer:-

In our loan review practice, we have an opportunity to work with ag banks throughout the
Midwest. In general, our findings are similar to what you may have read from many ag
economists. Working capital is dwindling quickly, and the debt to asset ratio is increasing as
is short-term debt. Many banks have been refinancing intermediate- and long-term assets to
fix working capital declines and carryover debt. Some borrowers have sold land to reduce
debt. We have seen many instances where borrowers have been able to reduce input costs
and, most importantly, cash rents to bring them back to the point where they are either
producing positive debt service coverage or are coming much closer to positive debt service
coverage than they were in 2014. But overall, balance sheets are weakening and repayment is
a continuing challenge. Credits that were barely a pass credit in better times have, in many
cases, dropped to Special Mention or Substandard. Solid pass credits from a couple of years
ago are now one weak year from a criticized level.

For many bankers, having struggling ag borrowers is a relatively new experience. I have
more recently been through the experience in working with struggling ag borrowers while
working at a western bank that had many cattle ranches that were severely impacted by low
cattle prices and drought conditions. Many of the lessons learned there are just as applicable
to the situation many of us face here in the Midwest.

As you head into renewal season, here are a few items to consider:

1. Complete information is critical. There is an old Russian proverb, Trust but verify. This
is good to keep in mind when analyzing your borrower. As things get tougher, there is a
temptation by some borrowers to not include every liability or to see some liabilities as
something not worth mentioning. When short-term borrowing gets tougher, some borrowers
will turn to using the local co-op for some inputs, borrowing from family and friends, or
using online lenders (FinTech has hit agriculture too) or credit cards. At renewal time at our
bank, we would send out a renewal package that had not only financial statement requests but
a complete debt schedule form and inquiry about other loans or bills from any source,
including family. We ran a new credit bureau report and compared it to prior ones to see if
any new credit card or other type of debt was taken out since the last renewal and looked for
any significant increases in balances, especially on credit cards. We completed a new UCC
search for the same reason. In the end, we wanted to be sure that all debts were accounted for
and had a source of repayment.

2. Restructure only if it helps. Often we see banks terming out any carryover debt or being
quick to term out short-term debt to improve working capital. Before you restructure debt,
make sure the underlying problem is fixed. Carryover debt usually occurs because the farmer
didnt make enough from crop/livestock sales to pay all term debt, operating lines, and living
expenses. Given that revenue isnt likely to grow in the next few years, improving cash flow
is about expense control. Has the operation cut input costs, cash rents (this is the big one),

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and living costs to a level they can produce enough profits to cover their debt payments and
family living? If so, then they are a perfect candidate for a restructure. If those tough choices
have not been made and the operation wont operate profitably, then you are likely to find
yourself with even more carryover, more debt, and far fewer options not far down the road.

3. Income taxes may become an issue. Section 179 deductions were very helpful to
reduce/eliminate income taxes in the past. But with far fewer pieces of equipment being
purchased, those deductions have decreased significantly. Prepaying expenses and holding
over grain sales can put off taxes for a while but, at some point, the timing can get tougher
and some operations will now show taxable income when their accrual earnings may be
negative. Those tax payments are often not planned for and can create a significant cash
outflow at exactly the wrong time. Its important that you encourage your borrowers to work
with their tax professionals to plan as far ahead as possible to minimize any tax
consequences.

4. Be empathetic and be realistic. Many of your borrowers were on top of the world a few
short years ago. Everything they did went well and equipment dealers (and friendly bankers)
made expansion with few tax consequences a reality. With todays reality of weak (if any)
earnings and less ability to add debt, it has become a very stressful time for many farmers and
their families. Its a lot tougher to be a banker too. Good bankers help their customers
succeed. Its not always easy and its often stressful, but letting customers operate
unprofitably and not trying to help them make tough decisions usually only makes the
problem get worse. Its so important to be empathetic with your borrowers and to have a thick
skin when they get mad. They may seem like theyre mad at you when they are really
frustrated about their current situation. However difficult the conversation may seem today,
its a far easier conversation than to have to tell someone that they have to quit farming and
start over.

2. What new expectations do your lenders have during the past several years and going
into future?
Answer

Poor economic forecasting, especially about interest rates, has been a feature of the post-
financial crisis years. There have been frequent predictions of imminent rate rises that have
simply not occurred as economists failed to grasp the extent of the headwinds that Western
economies faced.

It may therefore be tempting to ignore experts who now confidently predict that Mr Trump
will cause rates to rise. While Telegraph Money shares that scepticism, there are some
economists whose views are, we think, worth listening to.

oger Bootle, the Telegraph columnist who founded the Capital Economics consultancy, was
one of the few economists to correctly predict that interest rates would remain at rock-bottom
levels for many years after the financial crisis.

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For example, in this article from June 2009 he said Bank Rate could be kept at record lows
for as long as five years. While even he underestimated the extreme longevity of low rates,
markets were at the time predicting rates of 2.5pc by the end of 2010. In other words, he was
broadly right while the markets were hopelessly wrong.

So what does Mr Bootle expect now?

His forecast for 2017 is that there will be no change to Bank Rate, but that it could reach 3pc
by the end of 2019.

He said: Its quite possible that in three years time Bank Rate might be 3pc, and one has to
imagine that it is going back up to something like 5pc, but that might take a long time to get
to.

The most important factor in determining the timing of interest rate rises was the overall
strength of the economy, he added.

Mr Bootle also outlined some possible threats to any future rate rises.

First, even if there is strong economic growth the Bank of England may leave rates alone
because of concerns surrounding Brexit. If the economy is weak on top of Brexit anxiety,
rates could even be cut, he said.

Mr Bootle also addressed the likely influence of Mr Trumps election on interest rates in
Britain. If Trumps policies are to lead to stronger growth in the US in the short term and I
think they will the connection [with the British economy] wont be powerful but it will tend
to stoke growth in the UK, and British exports to America will be stronger.

All of that points in the direction of higher interest rates here.

The Bank of Englands American counterpart, the Federal Reserve, recently raised US rates
and Mr Bootle said that, while higher rates in the US didnt automatically mean higher rates
here too, in the past they have tended to follow suit.

3. What should be done to maintain strong cash and working capital reserves amidst
declining revenue?
Answer:-
Leveraging new order to cash (OTC) automation applications, combined with improved
processes, can transform companies from laggards to best in class. Here are 12 practical ways
to improve OTC processes and increase available working capital.

1) Good Information Systems: Most AR issues arise because ERP systems do not support
highly efficient OTC workflow, are difficult to operate and even harder to adapt to business
needs. A targeted system specifically designed to aggregate AR information across multiple
sources provides the workbench and toolsets so critical to the teams responsible for
converting cash, resolving disputes, assigning and rating risk credit, tasking daily activity and
delivering improved working capital results.

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2) Precise AR Measurement: The complexities surrounding deductions, disputes, short-pays,
broken promises, parent-child hierarchies, second and third party billings, progress payments,
billable versus non-billable, and complex payment terms can make it difficult to determine
the total amount of outstanding receivables. A system specifically designed to aggregate AR
information provides detailed insight into exactly how much AR is collectable today, in 30
days and in 60 days, and who is responsible for the action. Single-source reporting also
ensures that these critical calculations and assignments take seconds to complete, not hours,
days, or weeks.

3) Be AR Proactive: To generate as many payments as possible at or very near term, it is

critical to contact customers well before term with multiple reminders to ensure that there are
no invoice issues, that T&Cs are right, Freight and Tax is correct, etc. One day of pre-term
prevention is worth six to eight weeks of dispute resolution. Avoiding post-term disputes by
communicating with customers prior to term date provides a 30-40:1 advantage. Companies
need to exploit this every day.

4) AR Touches: One of the most important aspects of converting AR working capital is

increased AR touches. Most companies touch only 40-50% of their receivables-carrying
client base each 30-day cycle. If systems are not designed for touching every receivables
customer every 30-day cycle with a scalable, systematic and proactive workflow, companies
will have a hard time assuring that processes are delivering the desired results to 100% of the
AR portfolio.

5) Insightful Action: AR calculations need to be accurate for each business unit, sales region,
and product division, and accessible in seconds by collection teams interacting with payables
departments in order to effect more first-call resolutions. The system needs to guide
collectors and resolvers to initiate timely actions based on customer performance metrics.
Every missing piece of data reduces effectiveness in assigning tasks, executing workflow and
tracking group and individual productivity, ultimately impeding the release of strategic
working capital tied up in OTC processes.

6) Payment Behavior: It is essential to track customer payment behavior, as it reflects both

risk levels and your ability to convert cash more effectively. Events such as Broken
Promises and Material Deductions should generate electronic red flags and trigger
appropriate escalations and required sign-offs. Set automated tracking to watch for delays of
any kind and flag accounts whose patterns are deteriorating. Call these customers and initiate
strategic partnering discussions about their status. Seek an equitable solution that meets
everyones needs and that builds critical rapport with payables departments.

7) Invoice Disputes: Are these increasing in absolute terms or as a percentage of overall

receivables with any client? Its important to understand the root causes driving deductions in
order to prevent repetition, improve process quality and stop revenue leakage. This allows
systematic workflow design and measurement of resolution cycles for every dispute type and
each resolver. Finance, sales, services, marketing and product development can then deploy
upstream measures for preventing many deductions and their costly ripple effect on working
capital.

8) Overcome the 80/20 Rule: Typically, companies are constrained by resource availability to
focus only on the 20- 30% of their receivables that generate 70-80% of their sales revenue.
Systems which enable you to cover 100% of your AR portfolio, every 30 days, provide huge

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advantages. AR-focused automation facilitates touching 100% of receivables-carrying
customers every month while providing dynamically segmented account treatments,
intelligent activity tasking and workflow, and scalable, replicable processes that effect a
greater impact on overall working capital.

9) Crystal Clear Communications: During proactive, preterm communication with customers,

ask if the invoices were received, if they are clear and accurate, consistent with contract
terms, reflect sales specials or promotions they believe they should receive, whether three-
way matching requirements have been met and if the invoice has been approved to pay. If
not, identify problems such as credit terms or discount entitlements that are preventing timely
payments and record them for future reporting and root-cause analytics. Shorten Days to Pay
(DTP) by confirming that credit terms, conditions and timing are understood before payment
term is reached.

10) Dont Be DPO Fodder: Customers may try to optimize their working capital by practicing
DPO (Days Payable Outstanding) optimization methodologiesa euphemism for slow-pay.
Automated visibility into the customers changing payment trends keeps you ahead of the
payment curve by letting you proactively communicate with customers and become one of
the exceptions (preferred payee) to their standard DPO payment strategy.

11) When Revenues are Down: Even in declining revenue cycles companies can improve
working capital and liquidity with good processes supported by information systems that
deliver actionable data on a timely and automatic basis. Improving the value and productivity
of staff resources, especially if business is flat or declining, releases needed cash to
operations. Automation empowers staff with tools that help them improve available cash in
any situation.

12) Bonuses Tied To Working Capital: A sharp and welloiled OTC team is a tremendous
asset, but few Credit and Collections teams are actually incentivized to improve ke working
capital metrics like DSO, DTP and DPD. Review historical averages to obtain a baseline for
these cyclical metrics. Set a goal and reward the individuals, teams and departments that
unlock critical working capital trapped in current OTC processes. Reward creativity and
inspire exceptional contributions from others in the process.

Assignment C
Question No. 1
Dividend has no relationship with the value of the firm as per Walter Model.

Options
a) Yes
b) No
c) Can't say
d) Sometimes

Question No. 2
Wealth management and profit maximisation are the concepts.

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Options
a) Yes
b) Sometimes
c) No
d) Can't say

Question No. 3
Traditionally the role of finance manager was restricted to . of funds.
Options
a) Use
b) Procurement
c) Management
d) Administration

Question No. 4
The sales of a business or other form of revenue from operations of the business is called as
.
Options
a) Profit
b) Margin
c) Contribution
d) Turnover

Question No. 5
Implicit cost is the cost of using the funds.
Options
a) TRUE
b) FALSE
c) None
d) Sometimes False

Question No. 6
The process of calculating present value of projected cash flows.
Options
a) Discounting
b) Brokerage
c) Benefit
d) Budgeting

Question No. 7
A part of the organisation where the manager has responsibility for generating revenues,
controlling costs and producing a satisfactory return on capital invested in the division.
Options
a) Breakage

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 b) Brokerage
c) Division
d) Recasting

Question No. 8
Business practices designed by companies to make production and delivery systems more
competitive in world markets by eliminating or minimizing waste, errors, and costs.

Options
a) Reengineering
b) Restructuring
c) Revaluation
d) Recasting

Question No. 9
Cash in hand and cash at bank are examples of . assets.

Options
a) Current
b) Fixed
c) Working
d) Permanent

Question No. 10
Baumol model and the Miller-Orr model belong to . Management.

Options
a) Cash
b) Credit
c) Inventory
d) Purchase

Question No. 11
Current assets /Current liabilities describes . Ratio.
Options
a) Fixed Asset
b) Quick
c) Liquidity
d) Asset Turnover

Question No. 12
Inventory and receivables are both current assets.
Options
a) FALSE

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 b) Can't Say
c) Sometimes
d) TRUE

Question No. 13
Credit analysis, or the assessment of creditworthiness, is undertaken by analysing and
evaluating information relating to a customers history?

Options
a) Non-Financial
b) Non-Monetary
c) Financial
d) Monetary

Question No. 14
The objective of liquidity ensures that companies are able to meet their liabilities as they fall
due, and thus remain in business.
Options
a) Rare
b) TRUE
c) Sometimes
d) FALSE

Question No. 15
Funds held in the form of cash do not earn a return.
Options
a) TRUE
b) Sometimes
c) FALSE
d) Rare

Question No. 16
Holding costs can be . by reducing the level of inventory held by a company.
Options
a) minimised
b) control
c) increased
d) reduced

Question No. 17
Which technique brings inventory and cash requirement drastically down?
Options
a) LIFO
b) Bauman

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 c) ABC
d) JIT

Question No. 18
Which model belongs to cash management?

Options
a) LIFO
b) Miller Orr
c) HIFO
d) ABC

Question No. 19
JIT stands for just in . .
Options
a) totality
b) technical
c) tenure
d) time

Question No. 20
The factors to be considered in formulating a trade receivables policy relate to credit analysis,
credit control and receivables collection.
Options
a) TRUE
b) Sometimes
c) Rare
d) FALSE

Question No. 21
Companies with the same business operations may have levels of investment in
working capital as a result of adopting different working capital policies.
Options
a) lower
b) higher
c) different
d) Same

Question No. 22
Receivable management is all about?
Options
a) Cash Management
b) Loan Management
c) Credit Management

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 d) All

Question No. 23
The main reason that companies fail, though, is because they run out of .
Options
a) Customers
b) Inventory
c) Cash
d) Stock

Question No. 24
Is it right to say that good cash management is an essential part of good working capital
management.
Options
a) Sometimes
b) never
c) Always
d) Can't say

Question No. 25
Optimum cash balance must reflect the expected need for cash in the next budget period.
Options
a) never
b) Always
c) Can't say
d) Sometimes

Question No. 26
The cash operating cycle is the average ... of time between paying trade payables
and receiving cash from trade receivables.
Options
a) Lag
b) period
c) length
d) gap

Question No. 27
The length of the cash .. depends on working capital policy in relation to the
level of investment in working capital, and on the nature of the business operations of a
company.
Options
a) requirement
b) Operating Cycle
c) disbursal

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 d) Management

Question No. 28
Liquid funds, for example cash, earn no return and so will not increase profitability.
Options
a) TRUE
b) FALSE
c) rare
d) Sometimes

Question No. 29
.. Are your business scores that come from your Income Statement and
Balance Sheet, not the Cash Flow Statement?
Options
a) Marks
b) Financial Scores
c) Points
d) Ratios

Question No. 30
Working capital investment policy is concerned with the level of investment in
assets, with one company being compared with another.
Options
a) Permanent
b) Temporary
c) Current
d) Fixed

Question No. 31
.. can also be used to cover some of the risks associated with giving credit to
foreign customers.

Options
a) Locking
b) Awards
c) Insurance
d) Rewards

Question No. 32
Aggressive working capital finance means using more . term finance
Options
a) Credit
b) Short
c) Medium

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 d) Long

Question No. 33
Short-term finance is more flexible than long-term finance.
Options
a) TRUE
b) FALSE
c) Never
d) Sometimes

Question No. 34
Short-term finance tends to be more .. than long-term finance.
Options
a) Softer
b) Rigid
c) Flexible
d) harder

Question No. 35
Sales made but not collected is known as.?
Options
a) A/Cs Payables
b) A/Cs Receivables
c) Both
d) None

Question No. 36
. Interest rate depends upon an index and increases or decreases.
Options
a) Stationary
b) Variable
c) Stable
d) Fixed

Question No. 37
Short-term finance is more risky than long-term finance.
Options
a) FALSE
b) Never
c) Sometimes
d) TRUE

Question No. 38

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Rate risk refers to the fact that when short-term finance is renewed, the rates may vary when
compared to the .. rate.
Options
a) Current
b) Previous
c) Accounting
d) Industry

Question No. 39
The . principle suggests that long-term finance should be used for long-term
investment.
Options
a) Matching
b) Traditional
c) Dual Aspect
d) Monetary

Question No. 40
Money paid (cost of credit) for the use of money.
Options
a) Interest
b) Dividend
c) Usage Money
d) Principal

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