FINANCIAL MANAGEMENT Unit I: Nature of Financial Management: Meaning – Nature – Objectives – Scope- Functions of Financial Management – Financial forecasting – Financial Planning – Time Value of Money (NP) Unit II: Financing Decisions: Sources of Finance - Cost of Different Sources of Finance - Cost of Debt - Cost of Preference Capital - Cost of Equity Share - Cost of Retained Earnings - Weighted Average Cost of Capital – Capital structure – financial and operational Leverage (NP) Unit III: Investment Decision: Basics of Capital Budgeting - Appraisal and Evaluation of Long Term Investment Proposals - Pay Back Method - Accounting Rate of Return - Internal Rate of Return - Net Present Value - Profitability Index. (NP) Unit IV: Working Capital Management: Concept of Working Capital - Determinants of Working Capital - Operating Cycle – Computation of Working Capital Requirements (NP) Unit V: Dividend Policy: Stable Dividend – Dividend Theories - Factors Influencing Dividend Policy – Issues in Dividend Policy - Bonus Shares.

Definition of Working Capital Working capital is the amount of funds necessary to cover the cost operating the enterprise Circulating capital means current assets of a company that are changed in the ordinary course of business from one form to another.

Concepts of working capital Balance sheet concept Operating cycle or circular flow concept

Current Liabilities Current Assets Bank Overdraft Cash and Bank Balance Creditors Inventories: Raw- Materials Outstanding Expenses Work-in-progress Bills Payable Finished Goods Short-term Loans Bills Receivables Proposed Dividends Accrued Income Provision for Taxation, etc. Prepaid Expenses Accounts Receivables Short-term Investments

Balance sheets of a company as on 31 March 2007 as follows : Equity Share Capital10,00,000Goodwill 80,000 8% P.S. Capital 2,00,000Land and General Reserve 1,20,000 Building6,50,000 11% Debenture 5,00,000Plant and Profit & Loss A/c 2,10,000 Machinery 6,60,000 Bills Payable 30000Investments 2,20,000 Creditors 2,15,000Marketable securities 60,000 Provisions for tax 80,000Stock3,85,000 Proposed Dividend1,36,000Debtors4,15,000 O/s expenses Bills Receivable 50,000 Cash and Bank 93,000 Prepaid Expenses 11,000 25,34,000 25,34,000

THE WORKING CAPITAL CYCLE (OPERATING CYCLE) Accounts Payable Cash Raw Materials W I P Finished Goods Value Addition Accounts Receivable SALES

Operating Cycle Gross operating cycle = RMCP + WIPC + FGCP + RCP Net operating cycle = Gross operating cycle – Payable deferral period

Formulas Raw Material conversion = Average stock of raw material /Raw material consumption per day*365 Work in process conversion period = Average stock of work in progress/Total cost of production per day*365 Finished goods conversion period = Average stock of finished goods/Total cost of goods sold per day*365 Receivables conversion period = Average receivables/Net credit sales per day*365 Payables deferral period = Average payables/ net credit purchases per day*365

Problem Period covered 365 days Average period of credit allowed by suppliers 16 days Average total of debtors out standings Rs. 4,80,000 Raw material consumption Rs. 44,00,000 Total production cost 1,00,00,000 Total cost of goods sold Rs. 1,05,00,000 Sales for the year Rs. 1,60,00,000 Value of average stock maintained - Raw material Rs. 3,20,000 - WIP Rs. 3,50,000 - Finished goods Rs. 2,60,000

Raw Material conversion = / * 365 = 27 days Work in process conversion period = / *365 = 13 days Finished goods conversion period = / *365 = 9 days Receivables conversion period = / *365 = 11 days

From the following data compute the duration of operating cycle for each of the two companies XltdY ltd Stock: Raw Materials Work in process Finished goods Purchase of raw material Cost of goods produced Sale (credit basis) Debtors creditors Assume 360 days per year for computational purposes

Classification of working capital Working capital may be classified in two ways On the basis of concept On the basis of time Permanent or fixed working capital Temporary or variable working capital

Difference between permanent & temporary working capital Amount Variable Working Capital ofWorkingCapital Permanent Working Capital Permanent Working Capital Time Time

Variable Working Capital Amount of Working Capital Permanent Working Capital Time

PROFORMA - WORKING CAPTIAL ESTIMATES 1. TRADING CONCERN STATEMENT OF WORKING CAPITAL REQUIREMENTS Amount (Rs.) Current Assets (i) Cash ---- (ii) Receivables ( For…..Months Sales) (iii) Stocks ( For……Months Sales) (iv)Advance Payments if any ---- Less : Current Liabilities (i) Creditors (For….. Months Purchases) (ii) Lag in payment of expenses -----_ WORKING CAPITAL ( CA – CL ) xxx Add : Provision / Margin for Contingencies NET WORKING CAPITAL REQUIRED XXX STATEMENT OF WORKING CAPITAL REQUIREMENTS Amount (Rs.) Current Assets (i) Cash ---- (ii) Receivables ( For…..Months Sales) (iii) Stocks ( For……Months Sales) (iv)Advance Payments if any ---- Less : Current Liabilities (i) Creditors (For….. Months Purchases) (ii) Lag in payment of expenses -----_ WORKING CAPITAL ( CA – CL ) xxx Add : Provision / Margin for Contingencies NET WORKING CAPITAL REQUIRED XXX

1. MANUFACTURING CONCERN 1. MANUFACTURING CONCERN STATEMENT OF WORKING CAPITAL REQUIREMENTS Amount (Rs.) Current Assets (i) Stock of R M( for ….months consumption)----- (ii)Work-in-progress (for…months) (a) Raw Materials (b) Direct Labour----- (c) Overheads----- (iii) Stock of Finished Goods ( for …months sales) (a) Raw Materials----- (b) Direct Labour----- (c) Overheads----- (iv) Sundry Debtors ( for …months sales) (a) Raw Materials----- (b) Direct Labour----- (c) Overheads----- (v) Payments in Advance (if any)----- (iv) Balance of Cash for daily expenses----- (vii)Any other item Less : Current Liabilities (i) Creditors (For….. Months Purchases)----- (ii) Lag in payment of expenses----- (iii) Any other WORKING CAPITAL ( CA – CL )xxxx Add : Provision / Margin for Contingencies----- NET WORKING CAPITAL REQUIREDXXX

Adequate working capital Solvency Goodwill Easy loans Cash discount

Disadvantages of excess working capital Idle Unnecessary inventory Theft waste & losses Defective credit policy

Dangers of inadequate working capital Cannot meet its short term obligations Cannot buy requirements in bulk to avail discounts Cannot utilize fixed assts effectively

Factors determining working capital requirements Nature of the business Size of the business Production policy Length of production cycle Seasonal variations Stock turnover Credit policy Business cycles Dividend policy

Contd., Prices level changes Other factors – operating efficiency, management ability, irregularities of supply, import policy, labour

Important working capital ratios Current Ratio = Current assets/Current liabilities Acid-test ratio = Quick assets/Current liabilities Inventory turnover ratio= Cost of goods sold/Average inventory Debtors turnover ratio= Net credit sales/Average debtor Creditors turnover ratio = Net Credit purchase/Average Creditors