MicroLink Information Technology College and Business College

Department OF MBA

partment Of Accounting

INDIVIDUL ASAYMENT
ADVANCD FINANTIAL MANAGMENT

Prepared By: ASMELASH GIDEY WELDU

Id No: 3872 /19

Submitted To:

JUNE. 2020 G.C

MEKELLE,TIGRAy, ETHIOPIA

1|Page
 1. List out the finance functions and discuss the role of the financial

manager in relation to these functions

SOLUTION
The Finance function has been classified into three:

 Long-Term Finance– This includes finance of investment 3 years or more. Sources

of long-term finance include owner capital, share capital, long-term loans, debentures,
internal funds and so on.

 Medium Term Finance– This is financing done between 1 to 3 years, this can be
sourced from bank loans and financial institutions.

 Short Term Finance – This is finance needed below one year. Funds may be
acquired from bank overdrafts, commercial paper, advances from customers, trade
credit etc.

role of Finance Functions

 Investment Decisions– This is where the finance manager decides where to put the

company funds. Investment decisions relating to the management of working capital,
capital budgeting decisions, management of mergers, buying or leasing of assets.
Investment decisions should create revenue, profits and save costs.

 Financing Decisions– Here a company decides where to raise funds from. They are
two main sources to consider mainly equity and borrowed. From the two a decision
on the appropriate mix of short and long-term financing should be made. The sources
of financing best at a given time should also be agreed upon.

2|Page
  Dividend Decisions– These are decisions as to how much, how frequent and in what
form to return cash to owners. A balance between profits retained and the amount
paid out as dividends should be decided here.

 Liquidity Decisions– Liquidity means that a firm has enough money to pay its bills
when they are due and have sufficient cash reserves to meet unforeseen emergencies.
This decision involves the management of the current assets so you don’t become
insolvent or fail to make payments.

The Role of Financial Managers

Financial managers perform data analysis and advise senior managers on profit-maximizing
ideas. Financial managers are responsible for the financial health of an organization. They
produce financial reports, direct investment activities, and develop strategies and plans for the
long-term financial goals of their organization. Financial managers typically:

 Prepare financial statements, business activity reports, and forecasts,

 Monitor financial details to ensure that legal requirements are met,
 Supervise employees who do financial reporting and budgeting,
 Review company financial reports and seek ways to reduce costs,
 Analyze market trends to find opportunities for expansion or for acquiring other
companies,
 Help management make financial decisions.

The role of the financial manager, particularly in business, is changing in response to

technological advances that have significantly reduced the amount of time it takes to produce
financial reports. Financial managers’ main responsibility used to be monitoring a company’s
finances, but they now do more data analysis and advise senior managers on ideas to maximize
profits. They often work on teams, acting as business advisors to top executives.

2. Name five areas for which the Chief Financial Officer (CFO)/Director of Finance is
frequently responsible.

What Is a Chief Financial Officer?

A chief financial officer (CFO) is the senior executive responsible for managing the financial
actions of a company. The CFO's duties include tracking cash flow and financial planning as

3|Page
 well as analyzing the company's financial strengths and weaknesses and proposing corrective
actions.

The role of a CFO is similar to a treasurer or controller because they are responsible for
managing the finance and accounting divisions and for ensuring that the company’s
financial reports are accurate and completed in a timely manner. Many have a CMA
designation.

3. Name the areas for which the Chief Accountant (Controller) is frequently
responsible.
SOLUTION
Duties and Responsibilities
The principal duty CAOs and controllers share is responsibility for keeping the company
financially healthy. CAOs ensure the company’s financial systems comply with all government
regulations. Theirs is an officer-level position in the corporation that plays a key role in devising
the company’s long-range strategic financial planning. CAOs oversees the organization’s ledger
and financial accounts, cost controls, and other reporting and auditing functions. They work
closely with the CFO to report on financial operations and to analyze the impact important
business decisions will have on the company’s finances. For example, a shift to cloud computing
would impact facility costs should the company be stuck with long-term leases for buildings
housing the in-house computer systems the change will render obsolete.

While strategic financial planning is a CAO’s primary responsibility, other important matters are
typically handled by the CAO as well:

 Prepare quarterly financial reports and other SEC documents

 Ensure that general ledger accounting complies with generally accepted accounting
principles (GAAP) best practices
 Manage capital assets, including tax planning and compliance
By contrast, controllers closely monitor the day-to-day financial operations of the company.
They are the company’s official record keeper. Controllers are often responsible for hiring and
training employees in finance departments. A controller’s duties include ensuring the company
meets all tax, permit, and license requirements. Controllers are responsible for assisting external
auditors in confirming compliance with applicable financial standards and practices. For publicly
traded firms, controllers may handle all public financial filings.

Controllers have their fingers on the pulse of the company’s financial health. Other typical duties
of a controller include the following:

 Thorough knowledge of all company accounting procedures

 Management of payrolls and weekly job reports

4|Page
 Cash management and maintenance of bank account balances

4. Why do business enterprises need Finance?

SOLUTION

B/C

• To start a business

• For cashflow

• To finance new assets – machinery, cars and so on

• For new premises or extending an existing location

• Buying or combining with another business

• Other reasons include faster growth, succession

5. List out the two main types of lease financing employed to acquire the use
of assets
SOLUTION

A finance lease (also known as a capital lease or a sales lease) is a type of lease in which
a finance company is typically the legal owner of the asset for the duration of the lease, while the
lessee not only has operating control over the asset, but also some share of the economic risks
and returns from the change in the valuation of the underlying asset. [1]
More specifically, it is a commercial arrangement where:

 the lessee (customer or borrower) will select an asset (equipment, software);

 the lessor (finance company) will purchase that asset;
 the lessee will have use of that asset during the lease;
 the lessee will pay a series of rentals or installments for the use of that asset;
 the lessor will recover a large part or all of the cost of the asset plus earn interest from the
rentals paid by the lessee;

5|Page
 the lessee has the option to acquire ownership of the asset (e.g. paying the last rental, or
bargain option purchase price);
A finance lease has similar financial characteristics to hire purchase agreements and closed-end
leasing as the usual outcome is that the lessee will become the owner of the asset at the end of
the lease, but has different accounting treatments and tax implications. There may be tax benefits
for the lessee to lease an asset rather than purchase it and this may be the motivation to obtain a
finance lease.
6. List out the three approaches to determine the financing mix of working capital.
SOLUTION

1. The Hedging or Matching Approach:

The term ‘hedging’ usually refers to two off-selling transactions of a simultaneous but opposite

nature which counterbalance the effect of each other. With reference to financing mix, the term

hedging refers to ‘a process of matching maturities of debt with the maturities of financial

needs’.

According to this approach, the maturity of sources of funds should match the nature of assets to

be financed. This approach is, therefore, also known as ‘matching approach

this approach classifies the requirements of total working capital into two categories:

(i) Permanent or fixed working capital which is the minimum amount required to carry out the

normal business operations. It does not vary over time.

(ii) Temporary or seasonal working capital which is required to meet special exigencies. It

fluctuates over time.

The hedging approach suggests that the permanent working capital requirements should be

financed with funds from long-term sources while the temporary or seasonal working capital

requirements should be financed with short-term funds.

6|Page
2. The Conservative Approach:

This approach suggests that the entire estimated investments in current assets should be financed

from long-term sources and the short-term sources should be used only for emergency

requirements. According to this approach, the entire estimated requirements of Rs 52,000 in the

month of November (in the above given example) will be financed from long-term sources. The

short-term funds will be used only to meet emergencies.

the distinct features of this approach are:

(i) Liquidity is severally greater;

(ii) Risk is minimized; and

(iii) The cost of financing is relatively more as interest has to be paid even on seasonal

requirements for the entire period.

Trade off Between the Hedging and Conservative Approaches:

The hedging approach implies low cost, high profit and high risk while the conservative

approach leads to high cost, low profits and low risk. Both the approaches are the two extremes

and neither of them serves the purpose of efficient working capital management.

A trade-off between the two will then be an acceptable approach. The level of trade off may

differ from case to case depending upon the perception of risk by the persons involved in

financial decision-making.

However, one way of determining the trade off is by finding the average of maximum and the

minimum requirements of current assets or working capital. The average requirements so

7|Page
 calculated may be financed out of long-term funds and the excess over the average from the

short-term funds.

3. The Aggressive Approach:

The aggressive approach suggests that the entire estimated requirements of currents asset should

be financed from short-term sources and even a part of fixed assets investments be financed from

short-term sources. This approach makes the finance-mix more risky, less costly and more

profitable.

7. Describe the methods of raising finance to meet long-term needs.

SOLUTION

Long-Term Sources of Finance

Long-term financing means capital requirements for a period of more than 5 years to 10, 15, 20
years or maybe more depending on other factors. Capital expenditures in fixed assets like plant
and machinery, land and building, etc of business are funded using long-term sources of finance.
Part of working capital which permanently stays with the business is also financed with long-
term sources of funds. Long-term financing sources can be in the form of any of them:
 Share Capital or Equity Shares
 Preference Capital or Preference Shares
 Retained Earnings or Internal Accruals
 Debenture / Bonds
 Term Loans from Financial Institutes, Government, and Commercial Banks
 Venture Funding
 Asset Securitization
 International Financing by way of Euro Issue, Foreign Currency Loans, ADR, GDR, etc.

8. Briefly explain the different sources of raising finance available to

commerce and industries
SOLUTION

Sources of Finance
Sources of finance for business are equity, debt, debentures, retained earnings, term loans,
working capital loans, letter of credit, euro issue, venture funding etc. These sources of funds are
used in different situations. They are classified based on time period, ownership and control, and
their source of generation. It is ideal to evaluate each source of capital before opting for it.

8|Page
Sources of capital are the most explorable area especially for the entrepreneurs who are about to
start a new business. It is perhaps the toughest part of all the efforts. There are various capital
sources, we can classify on the basis of different parameters.

Having known that there are many alternatives to finance or capital, a company can choose from.
Choosing the right source and the right mix of finance is a key challenge for every finance
manager. The process of selecting the right source of finance involves in-depth analysis of each
and every source of fund. For analyzing and comparing the sources, it needs the understanding of
all the characteristics of the financing sources. There are many characteristics on the basis of
which sources of finance are classified.
On the basis of a time period, sources are classified as long-term, medium term, and short term.
Ownership and control classify sources of finance into owned and borrowed capital. Internal
sources and external sources are the two sources of generation of capital. All the sources have
different characteristics to suit different types of requirements. Let’s understand them in a little
depth.

According to Time Period

Sources of financing a business are classified based on the time period for which the money is
required. The time period is commonly classified into the following three:

LONG TERM SOURCES OF MEDIUM TERM SOURCES SHORT TERM SOURCE

FINANCE / FUNDS OF FINANCE / FUNDS OF FINANCE / FUNDS

Preference Capital or Preference

Share Capital or Equity Shares Shares Trade Credit

Preference Capital or Preference

Shares Debenture / Bonds Factoring Services 

Retained Earnings or Internal

Accruals Lease Finance Bill Discounting etc.

Advances received from

Debenture / Bonds Hire Purchase Finance customers

Term Loans from Financial Medium Term Loans from Short Term Loans like
Institutes, Government, and Financial Institutes, Government, Working Capital Loans from
Commercial Banks and Commercial Banks Commercial Banks 

Venture Funding Fixed Deposits (<1 Year)

Asset Securitization Receivables and Payables

International Financing by way of

Euro Issue, Foreign Currency
Loans, ADR, GDR etc.

9|Page
 Long-Term Sources of Finance
Long-term financing means capital requirements for a period of more than 5 years to 10, 15, 20
years or maybe more depending on other factors. Capital expenditures in fixed assets like plant
and machinery, land and building, etc of business are funded using long-term sources of finance.
Part of working capital which permanently stays with the business is also financed with long-
term sources of funds. Long-term financing sources can be in the form of any of them:
 Share Capital or Equity Shares
 Preference Capital or Preference Shares
 Retained Earnings or Internal Accruals
 Debenture / Bonds
 Term Loans from Financial Institutes, Government, and Commercial Banks
 Venture Funding
 Asset Securitization
 International Financing by way of Euro Issue, Foreign Currency Loans, ADR, GDR, etc.
Medium Term Sources of Finance
Medium term financing means financing for a period of 3 to 5 years and 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. Medium term financing sources can in the form of one of them:

 Preference Capital or Preference Shares

 Debenture / Bonds
 Medium Term Loans from
o Financial Institutes
o Government, and
o Commercial Banks
 Lease Finance
 Hire Purchase Finance
Short Term Sources of Finance
Short term financing means financing for a period of less than 1 year. The need for short-term
finance arises to finance the current assets of a business like an inventory of raw material and
finished goods, debtors, minimum cash and bank balance etc. Short-term financing is also named
as working capital financing. Short term finances are available in the form of:
 Trade Credit
 Short Term Loans like Working Capital Loans from Commercial Banks
 Fixed Deposits for a period of 1 year or less
 Advances received from customers
 Creditors
 Payables
 Factoring Services
 Bill Discounting etc.
According to Ownership and Control:
Sources of finances are classified based on ownership and control over the business. These two
parameters are an important consideration while selecting a source of funds for the business.
Whenever we bring in capital, there are two types of costs – one is the interest and another is

10 | P a g e
 sharing ownership and control. Some entrepreneurs may not like to dilute their ownership rights
in the business and others may believe in sharing the risk.
OWNED CAPITAL BORROWED CAPITAL

Equity Financial institutions,

Preference Commercial banks or

Retained Earnings The general public in case of debentures.

Convertible Debentures  

Venture Fund or Private Equity  

Owned Capital
Owned capital also refers to equity. It is sourced from promoters of the company or from the
general public by issuing new equity shares. Promoters start the business by bringing in the
required money for a startup. Following are the sources of Owned Capital:

 Equity
 Preference
 Retained Earnings
 Convertible Debentures
 Venture Fund or Private Equity
Further, when the business grows and internal accruals like profits of the company are not
enough to satisfy financing requirements, the promoters have a choice of selecting ownership
capital or non-ownership capital. This decision is up to the promoters. Still, to discuss, certain
advantages of equity capital are as follows:

 It is a long-term capital which means it stays permanently with the business.

 There is no burden of paying interest or installments like borrowed capital. So, the risk of
bankruptcy also reduces. Businesses in infancy stages prefer equity for this reason.
Borrowed Capital
Borrowed or debt capital is the finance arranged from outside sources. These sources of debt
financing include the following:
 Financial institutions,
 Commercial banks or
 The general public in case of debentures
In this type of capital, the borrower has a charge on the assets of the business which means the
company will pay the borrower by selling the assets in case of liquidation. Another feature of the
borrowed fund is a regular payment of fixed interest and repayment of capital. Certain
advantages of borrowing are as follows:

 There is no dilution in ownership and control of the business.

 The cost of borrowed funds is low since it is a deductible expense for taxation purpose
which ends up saving on taxes for the company.

11 | P a g e
 It gives the business the benefit of leverage.
ACCORDING TO SOURCE OF GENERATION:
Based on the source of generation, the following are the internal and external sources of
finance:
INTERNAL SOURCES EXTERNAL SOURCES

Retained profits Equity

Reduction or controlling of working capital Debt or Debt from Banks

All others except mentioned in Interna

Sale of assets etc. Sources
Internal Sources
The internal source of capital is the one which is generated internally by the business. These are
as follows:
 Retained profits
 Reduction or controlling of working capital
 Sale of assets etc.
The internal source of funds has the same characteristics of owned capital. The best part of the
internal sourcing of capital is that the business grows by itself and does not depend on outside
parties. Disadvantages of both equity and debt are not present in this form of financing. Neither
ownership dilutes nor fixed obligation/bankruptcy risk arises.

External Sources
An external source of finance is the capital generated from outside the business. Apart from the
internal sources of funds, all the sources are external sources.
Deciding the right source of funds is a crucial business decision taken by top-level finance
managers. The usage of the wrong source increases the cost of funds which in turn would have a
direct impact on the feasibility of the project under concern. Improper match of the type of
capital with business requirements may go against the smooth functioning of the business. For
instance, if fixed assets, which derive benefits after 2 years, are financed through short-term
finances will create cash flow mismatch after one year and the manager will again have to look
for finances and pay the fee for raising capital again.
10. List out the successive events which are typically involved in the flow of
business activities
SOLUTION

Understanding Business Activities

There are three main types of business activities: operating, investing, and financing. The cash
flows used and created by each of these activities are listed in the cash flow statement. The cash
flow statement is meant to be a reconciliation of net income on an accrual basis to cash flow. Net
income is taken from the bottom of the income statement, and the cash impact of balance sheet
changes are identified to reconcile back to actual cash inflows and outflows.

12 | P a g e
Noncash items previously deducted from net income are added back to determine cash flow;
noncash items previously added to net income are deducted to determine cash flows. The result
is a report that gives the investor a summary of business activities within the company on a cash
basis, segregated by the specific types of activity.

Operating Business Activities

The first section of the cash flow statement is cash flow from operating activities. These
activities include many items from the income statement and the current portion of the balance
sheet. The cash flow statement adds back certain noncash items such
as depreciation and amortization. Then changes in balance sheet line items, such as accounts
receivable and accounts payable, are either added or subtracted based on their previous impact
on net income.

These line items impact the net income on the income statement but do not result in a movement
of cash in or out of the company. If cash flows from operating business activities are negative, it
means the company must be financing its operating activities through either investing activities
or financing activities. Routinely negative operating cash flow is not common outside
of nonprofits.

Investing Business Activities

Investing activities are in the second section of the statement of cash flows. These are business
activities that are capitalized over more than one year. The purchase of long-term assets is
recorded as a use of cash in this section. Likewise, the sale of real estate is shown as a source of
cash. The line item "capital expenditures" is considered an investing activity and can be found in
this section of the cash flow statement.

Financing Business Activities

The cash flow statement's final section includes financing activities. These include initial public
offerings, secondary offerings, and debt financing. The section also lists the amount of cash
being paid out for dividends, share repurchases, and interest. Any business activity related to
financing and fundraising efforts is included in this section of the cash flow statement.

13 | P a g e