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Note for Advanced Financial Management - AFM By JNTU Heroes

  • Advanced Financial Management - AFM
  • Note
  • Jawaharlal Nehru Technological University Anantapur (JNTU) College of Engineering (CEP), Pulivendula, Pulivendula, Andhra Pradesh, India - JNTUACEP
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1 No. of Lecture Hrs/week: 04 Total No. of Lecture Hrs. 56 Practical Component: 01 Hr/ Week Exam Hrs. 03 IA Marks: 50 Exam Marks: 100 Syllabus MODULE 1 Working capital management Determination of level of current Assets Sources for financing working capital. Bank finance for working capital (No problems on estimation of working capital) Working capital financing: Short term financing of working capital, long term financing of working capital. Working capital leverages MODULE 2 Cash Management Forecasting cash flows – Cash budgets, long-term cash forecasting, monitoring collections and receivables, optimal cash balances – Baumol model, Miller-orr model, and stone model. Strategies for managing surplus fund. MODULE 3 Receivables Management Credit management through credit policy variables, marginal analysis, and Credit evaluation: Numerical credit scoring a n d d i s c r i m i n a t e anal ysi s . Control o f a c c o u n t s recei v abl es , Factoring. MODULE 4 Inventory Management Determinations of inventory control levels: Ordering, reordering, danger level. EOQ model. Pricing of raw material. Monitoring and control of inventories, ABC Analysis. MODULE 5 Capital structure decisions – NI capital structure & market value of a firm. Theories of capital structure approach, NOI approach, Modigliani Miller approach, traditional approach. Arbitrage process in capital structure. Planning the capital structure: EBIT and EPS analysis. ROI & ROE analysis. Capital structure policy. MODULE 6 Dividend policy Theories of dividend policy: relevance and irrelevance dividend decision. Walter‟s & Gordon‟s model, Modigliani & Miller approach. Dividend policies – stable dividend, stable payout and growth. Bonus shares and stock split corporate dividend behavior. Legal and procedural aspects of dividends Corporate Dividend Tax. MODULE 7 Special issues in financial management Corporate financial modelling Agency problem and consideration. Effect of inflation on Asset value, firm value, returns Financial planning – Basis of financial planning, sales forecast method, pro-forma P & L account method, pro-forma balance sheet method, determination of External Financing Requirement (EFR).

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2 Index Modules Content Page No. 1 Working Capital Management 3-6 2 Cash Management 7-10 3 Receivables Management 11-24 4 Inventory Management 25-32 5 Capital structure decisions 33-39 6 Dividend policy 40-42 7 Special issues in financial management 43-49

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3 Module-1 Working Capital Management One of the most important areas in the day to day management of the firm is the management of working capital. Working capital refers to the funds held in current assets. Current assets are essential to use fixed assets. The requirements for current assets are usually greater than the amount of funds available through current liabilities OPTIMUM INVESTMENT The importance of adequate working capital can never be over emphasized. A firm has to be very careful in estimating its working capital. The effective management of working capital is the primary means of achieving the firm’s goal of adequate liquidity. A very big amount of working capital would mean that the firm has idle funds. This results in over capitalization. Over capitalization implies that the firm has too large funds for its requirements, resulting in a low rate of return. If the firm has inadequate working capital, it is said to be undercapitalized. Such a firm runs the risk of insolvency. Shortage of working capital may lead to a situation where the firm may not be able to meet its liabilities. Hence it is very essential to estimate the requirements of working capital carefully and determine the optimum level of investment in it. At the optimum level of working capital the profitability will be maximum. Concepts of working capital Gross Working Capital: The Gross working capital refers to investment in all the current assets taken together. Current assets are the assets which can be converted into cash within an accounting year or operating cycle and include cash, short-term securities, debtors, bills receivable and inventory. 2. Net working Capital: The term ‘net working capital’ refers to excess of total current assets over total current liabilities. Current liabilities are those claims of outsider’s which are expected to mature for payments within an accounting year and include creditors, bills payable and outstanding expenses. Networking capital can be positive (CA>CL) or negative (CA< CL). Net working capital is that position of current assets which is financed with the long term funds. Need for working capital management      In a typical manufacturing firm, current assets exceed one-half of total assets. Excessive levels can result in a substandard Return on Investment (ROI). Current liabilities are the principal source of external financing for small firms. Requires continuous, day-to-day managerial supervision. Working capital management affects the company’s risk, return, and share price. Importance A firm needs funds for its day to day running. Adequacy or inadequacy of these funds would determine the efficiency with which the daily business may be carried on. It is to be ensured that

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4 the amount of working capital available within the firms is neither too large nor too small for its requirements. For the following reasons working capital should be adequate.     To meet the short term obligations. To avail the market opportunities such as purchase of raw materials at the lowest price, with discount etc. To enable the firm to operate more efficiently and meet the raising turnover thus peak needs can be taken care off. To enable the firm to extend favourable credit terms to the customers. Optimum working Capital Current ratio, with acid test ratio to supplement it, has traditionally been considered the best indicator of the working capital situation. A current ratio of 2 for a manufacturing firm implies that the firm has an optimum account of working capital. This is supplemented by the Acid Test Ratio which should be at least one. It is considered that there is a comfortable liquidity position if liquid current assets are equal to current liabilities. Optimum working capital can be determined only with reference to the particular circumstances of a specific situation. In a firm 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. An optimum working capital ratio dependent upon the business situation as such, and the nature and composition of various current assets. WORKING CAPITAL CYCLE The working capital cycle/ Operating cycle refers to the length of time between the firms paying cash for materials etc., entering into the production process/inventory and the inflow of cash from sale of finished goods. PHASES OF WORKING CAPITAL The operating cycle (working capital cycle) in a manufacturing firm consists of the following events, which continues throughout the life of business. Conversion of cash into raw materials Conversion of raw materials into work in progress Conversion of working progress into finished goods Conversion of finished goods into accounts receivable through sales

Lecture Notes