NES RATNAM COLLEGE OF ARTS, SCIENCE AND COMMERCE

INTERNAL EXAM - SEMESTER IV

Subject: Advanced Financial Management.

Name: Pooja Maurya

Roll No: 26

1. Explain various sources of Finance in detail?

Ans. Finance is significant for business because it cannot carry out its operations even for a
single day without finance. It is therefore important to search the sources from where funds
can be collected. The selection of source depends upon the amount of funds required, nature
of business, repayment period, debt-equity mix, etc. The selection of source also depends
upon the purposes for which funds are needed.

There are three types of sources of fund i.e.

A. Long term sources of finance

B. Medium term sources of finance
C. Short term sources of finance

LONG TERM SOURCES OF FINANCE

A firm needs funds to purchase fixed assets such as land, plant & machinery, furniture, etc.
These assets should be purchased from those funds which have a longer maturity repayment
period i.e it fulfils the financial requirements of a business for a period more than 5
years. The capital required for purchasing these assets is known as fixed capital. So, funds
required for fixed capital must be financed using long-term sources of finance.

MEDIUM TERM SOURCES OF FINANCE

Medium-term sources are the sources where the funds are required for a period of more than
one year but less than five years and it is used generally for two reasons. One, when long-
term capital is not available for the time being and second when deferred revenue
expenditures like advertisements are made which are to be written off over a period of 3 to 5
years. The sources of the medium term include borrowings from commercial banks, public
deposits, lease financing and loans from financial institutions.

SHORT TERM SOURCES OF FUNDS

Short-term sources Funds which are required for a period not exceeding one year are called
short-term sources. Trade credit, loans from commercial banks and commercial papers are the
examples of the sources that provide funds for short duration

Short-term financing is very common for the financing of present assets such as inventories and
account receivables. Seasonal businesses that must build inventories in terms of future prospects
of selling requirements often need short-term financing for the interim period between seasons.
Wholesalers and manufacturers with a major portion of their assets used in inventories or
receivables also require a large number of funds for a short period.

2. Explain classification of Capital budgeting techniques?

Ans. Capital budgeting is a process of evaluating investments and huge expenses in order to
obtain the best returns on investment. There are different methods adopted for capital
budgeting. The traditional methods or non-discount methods include:

 PAYBACK PERIOD

This method refers to the period in which the proposal will generate cash to recover the initial
investment made. It purely emphasizes on the cash inflows, economic life of the project and
the investment made in the project, with no consideration to time value of money. Through
this method selection of a proposal is based on the earning capacity of the project. With
simple calculations, selection or rejection of the project can be done, with results that will
help gauge the risks involved. However, as the method is based on thumb rule, it does not
consider the importance of time value of money and so the relevant dimensions of
profitability.

Payback period = Cash outlay (investment) / Annual cash inflow = C / A

 ACCOUNTING RATE OF RETURN METHOD (ARR)

This method helps to overcome the disadvantages of the payback period method. The rate of
return is expressed as a percentage of the earnings of the investment in a particular project. It
works on the criteria that any project having ARR higher than the minimum rate established
by the management will be considered and those below the predetermined rate are rejected.
This method takes into account the entire economic life of a project providing a better means
of comparison. It also ensures compensation of expected profitability of projects through the
concept of net earnings. However, this method also ignores time value of money and doesn’t
consider the length of life of the projects. Also, it is not consistent with the firm’s objective of
maximizing the market value of shares.

ARR= Average income/Average Investment

 NET PRESENT VALUE METHOD

In this technique the cash inflow that is expected at different periods of time is discounted at
a particular rate. The present values of the cash inflow are compared to the original
investment. If the difference between them is positive (+) then it is accepted or otherwise
rejected. This method considers the time value of money and is consistent with the objective
of maximizing profits for the owners.

 INTERNAL RATE OF RETURN METHOD

This is defined as the rate at which the net present value of the investment is zero. The
discounted cash inflow is equal to the discounted cash outflow. This method also considers
time value of money. It tries to arrive to a rate of interest at which funds invested in the
project could be repaid out of the cash inflows. However, computation of IRR is a tedious
task. It is called internal rate because it depends solely on the outlay and proceeds associated
with the project and not any rate determined outside the investment.

 PROFITABILITY INDEX

It is the ratio of the present value of future cash benefits, at the required rate of return to the
initial cash outflow of the investment. It may be gross or net, net being simply gross minus
one.
3. Explain various types of working Capital in detail?

Working Capital is basically an indicator of the short-term financial position of an

organization and is also a measure of its overall efficiency. Working Capital is obtained by
subtracting the current liabilities from the current assets. This ratio indicates whether the
company possesses sufficient assets to cover its short-term debt.

Working capital are of various types. They are explained as follows:

 PERMANENT WORKING CAPITAL.

Permanent working capital implies the base investment amount in all types of current
resources which is respected at all times to carry on business activities. The value of current
assets has been increased or decreased over a period of time. Even though, there is a need of
having minimum level of current assets at all times in order to carry on the business activities
effectively. It is otherwise called as Fixed Working Capital.

 TEMPORARY WORKING CAPITAL.

It is otherwise called as Fluctuating or Variable Working Capital. There is a close

relationship prevailing between temporary working capital and the level of production and
sales. There is no uniform production and sales throughout the year. If heavy order is
received for production and there is a large amount of credit sales, there is a need of more
amount of temporary working capital. At the same time, if production is carried on in
anticipation of demand in near future, temporary working capital is required.

 NEGATIVE WORKING CAPITAL

Sometimes, the value of current assets is less than the current liabilities, it shows negative
working capital. If such type of situation arises, the firm is going to meet the financial crisis
very shortly.

 RESEARCH WORKING CAPITAL

It refers to the short-term financial arrangement made by the business units to meet uncertain
changes or to meet uncertainties. A firm is always working with the expectation of some risks
which may be controllable or uncontrollable. The reserve working capital can be used in
order to meet the uncontrollable risks and sustain in the business world. It is also called
as Cushion Working Capital.
  REGULAR WORKING CAPITAL

The minimum amount of working capital to be maintained in normal condition is called

Regular Working Capital.

 SEASONAL WORKING CAPITAL

Some products have seasonal demand. Seasonal demand arises due to festival. In this way,
seasonal working capital means an amount of working capital maintained to meet the
seasonal demand of the product.

 SPECIAL WORKING CAPITAL

Special programmes may be conducted for business development. The programmes may
be advertisement campaign, sales promotion activities, product development
activities, marketing research activities, launching of new products, expansion of markets and
the like. Therefore, special working capital means an amount of working capital maintained
to meet the expenses of special programmes of the company.

4. Explain inventory Management in detail?

Ans. Inventory management is a systematic approach to sourcing, storing, and selling

inventory—both raw materials (components) and finished goods (products).
In business terms, inventory management means the right stock, at the right levels, in the
right place, at the right time, and at the right cost as well as price. As a part of your supply
chain, inventory management includes aspects such as controlling and overseeing purchases,
from suppliers as well as customers, maintaining the storage of stock, controlling the amount
of product for sale, and order fulfilment.

There are a few types of inventory that companies of all shapes and sizes deal with at varying
points:

 RAW MATERIALS

They are any items used to manufacture components or finished products. Raw materials are
necessary to the life of any business. They’re made up of the materials your business uses to
produce its own goods. For example, water, sugar, and lemon would be the raw materials
you’d need if you run a lemonade business. Without those raw materials, you can’t produce
the beverage you market and sell. Lemonade on hand = satisfied (and no longer thirsty)
customers.
 WORK IN PROGRESS
It refers to unfinished items moving through production but not yet ready for sale. Work-in-
progress (WIP) is made up of the different parts that are being processed in a system,
including all: necessary materials, parts/components, Assemblies, subassemblies. WIP
usually includes raw materials that have been released for initial processing. It also covers the
entire process of a production. Say, for example, you own an auto repair company. Brake
pads would be part of your WIP.
 MAINTENANCE, REPAIR AND OPERATIONS (MRO) GOODS

Maintenance, repair, and operating supplies, or MRO goods, are items that are used to
support and maintain the production process and its infrastructure. These goods are usually
consumed as a result of the production process but are not directly a part of the finished
product. Examples of MRO goods include oils, lubricants, coolants, janitorial supplies,
uniforms, gloves, packing material, tools, nuts, bolts, screws, shim stock, and key stock. Even
office supplies such as staples, pens and pencils, copier paper, and toner are considered part
of MRO goods inventory.

 FINISHED GOODS

A finished good is a completed part that is ready for a customer order. Therefore, finished
goods inventory is the stock of completed products. These goods have been inspected and
have passed final inspection requirements so that they can be transferred out of work-in-
process and into finished goods inventory. From this point, finished goods can be sold
directly to their final user, sold to retailers, sold to wholesalers, sent to distribution centers, or
held in anticipation of a customer order.
5. Explain Receivable Management in detail?

Ans. Receivable Management means collecting the payments due for Sales in a timely
manner.  When we sell any services, products or solutions to our clients or customers, they
owe us the money. Collecting that money is called Receivables Management. In Accounting
terms Our Customers who owe us money are called as “Sundry Debtors”. Yes, they are called
Debtors, because they owe us money.

Objectives of Receivable Management are as follows:

In order to keep business running, we need cash. The whole purpose or objective of
Receivables Management is to keep inflow of cash healthy.

In other words, these are the objectives of Payment Collection.

 Collect receivables from our sundry debtors.

 Maintain a healthy cash flow for the company, so that it can pay our creditors.
 Have proper Policy for Credit management.
 A working process and mechanism for managing payment follow ups and timely
collection.

Importance of Receivable Management are as follows

1. Cash flow is always considered as bloodline of any business organisation. Badly

managed Receivables can break the company.
2. Most of the companies that go bankrupt have Cash flow problems. Companies with
lack of profit can survive, but lack of cash flow is fatal.
3. Working Capital is one the costliest form of capital. One of the ways of calculating
working capital requirement can be defined as the difference between Sales and
Receivables. Bad collections can mean higher working capital requirements. Which
means higher interest costs for the company.
4. A reliable and predictable Receivables will ensure steady cash flow management of
the organisation. Amounts receivables with no due dates are useless.