Final Report (F9) Unit 10 LO1-2

8/8/2019 Final Report (F9) Unit 10 LO1-2

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Accounting Unit: 10

Managing Finances: Working Capital and Cash Management.

Assignment on: The scope of financial management, working capital needs andfunding strategies.

Prepared by:

SAKIB RAHMAN

ID: 5145

Prepared on:

Anlima Group

Corporate Headquarters :

Anlima GroupSuit # 4/3, City Heart

67 Naya Paltan, Dhaka - 1000Tel: 88-02-9349881-4, 9341373, 8317216

Fax: 88-02-8317184E-mail : mailto:[email protected]
mailto:[email protected]:[email protected]


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Acknowledgement

In preparing this assignment a long, ambitious and rigorous work plan was constructed.

For the successful completion of the work plan the unbridled support of my subjectcoordinator and mentor came as a veritable source of knowledge and mental strength. Aespecial thanks goes to the spokesperson of National Credit & Commerce Bank Ltd. forhis time, resource and continual cooperation and assistance.

I would like to express my sincere gratitude to assignment super-visor and subjectcoordinator, MD. Noman H. Chowdhury, for his timely instructions and interventionskeeping the project focused on its objective.


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Table of Contents

Table of Contents.............................................................................................3

Accounts Receivable......................................................................................20

Inventories.....................................................................................................21

COMPANY BACKGROUND

A VISION TO CHERISH


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The companys has a vision where they have relentless endeavor

to

contribute in Bangladeshs economic advancement in the global context. The company

has a motive to work for the enhancement of the country's position as an international

provider of quality products.

MISSION

The mission here is to strive hard to be a provider of world class textile and garment

products and services, while positioning the country in the higher value segment of the

international textile market. The companys goal is to satisfy customers through

technological superiority and synergic synchronization of man and machine, tailoring

quality products and services to harvest the reward of responsibility.

VALUES TO UPHOLD

Anlima Textile Ltd. holds the value to create a better future for the stakeholders of the

company, maintaining high standards of integrity, propriety and goodwill in shouldering

social responsibilities. To assimilate efficiency, innovation and state-of-the-art

technology for developing operational infrastructure and to establish linkages and

integration the company forwards its activities at achievable targets. The management of

the company also works to foster an environment conducive to grooming productive

talent and to forging mutually rewarding relationships with employees, clients and

society, based on the highest standard of professionalism.

GOALS TO PURSUE


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The goal of the company is to satisfy customers through technological superiority and

synergic synchronization of man and machine, tailoring quality products and services to

harvest the reward of responsibility.

DIVISIONS

Anlima Textile Ltd. - An export oriented knit textile composite project with state-of-the-

art knitting dyeing, fishing and garments machinery under one roof.

Products :

Knit Fabrics

Dyeing

Finishing

Garment

Anlima Yarn Dyeing Ltd. - The house of quality yarn dyeing catering to the need of

international textile market - knitting & weaving fabrics and sweater factories.

Products :

Dyeing Services

Sewing Thread

Dyed Cotton Yarn

Allied Enterprise Ltd. - Builder of prestigious shopping-cum-commercial complex.

Products :


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Office Spaces

Anlima Build-Tech Ltd. - Developer of luxury residential apartments for the clients

looking for real value for their money.

Products :

Flats of different sizes

Task 1:

Analyze the nature and scope of financial management activities of your choosen

organization.


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Anlima Groups financial management is about planning and controlling the financialaffairs of the organization, to ensure that the organization achieves its objectives,particularly its financial objectives. This involves decisions about:

How much finance the business need for its operations, both its day to dayoperations and for its long-term investment projects.

Where the finance should be obtained from: long-term finance is raised as equitycapital (share capital and profits) or as debt capital, and short term finance isobtained mainly from trade suppliers and bank overdrafts.

What should be the balance between long-term and short-term finance, whatshould be the balance between equity capital and debt capital

Investing short term cash surpluses

Ensure that the providers of finance are suitably rewarded: Anlima group makesure that it can meet the interest payments on its borrowing, and companies mustensure that shareholders receive an appropriate dividend out of profit

Where appropriate, protecting the organization against financial risk

Anlima Groups management accounting systems provide information, both financial andnon financial, to assist management with making decisions about planning andcontrolling the resources of the organization. Important elements of Anlima groupssystem of management accounting are:

Financial planning, particularly budgeting

Control reporting systems, particularly budgetary control and variance reporting

System for monitoring the costs and performance of Anlima group

Providing information to assist with decition-making, both short term decisionsand long term decisions (investment decisions).

Comments-

Financial accounting systems of Anlima are concerned with reporting the financialposition and financial performance of the organization. It reports on historicalperformance. However, the systems for reporting historical performance are also relevantfor planning for the future. An important aspect of Anlimas financial management is toplan and control strategic and operations so that financial performance is consistent withthe organizations objectives.

Task 2:

List down different stakeholders names of your chosen organization and briefly

describe their relationship with the organization.

Stakeholders and their objectives:


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Different stakeholders names of ANLIMA GROUP and their relationship with theorganization are as follows:

INTERNAL:

Employee: Want to maximize rewards and prolonged employment assurance Managers: Want to maximize rewards and prolonged employment assurance

CONNECTED:

Shareholders: Wants to maximize their wealth

Debt lenders: Wants to increase their invested money

Customers: Wants better services and the assurance of security for their valuables

Bankers: Wants to expand their increase their financial transection

Suppliers: Wants to be paid in full and in time

EXTERNAL:

Government: Wants sustained economic growth and high levels of employment

Legal governing bodies: Legal bodies enforcing legal mandates standardizing theprotocols for running a bank.

Although the theoretical objective of a company is to maximize the wealth of its owners,but Anlima group has some other factors that influence objectives. Such as, Incentiveschemes.

Incentive schemes: Managers may be encouraged to work in the best interests of thecompany if there are incentives schemes linked to profit or share price. This incentiveschemes include-

Profit-related pay Share option schemes

Comments-

There are several stakeholders in a company and this presents a problem for the financialmanager in deciding which stakeholder objectives are the more important and how tosatisfy several different types of stakeholder objectives are the more important and howto satisfy several different types of stakeholder at the same time.

Task 3

Briefly describe the financial objective of your organization.

The following are the mission, values to uphold and goals to pursue of the Anlima Groupof Industries.


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MISSION

The mission here is to strive hard to be a provider of world class textile and garment

products and services, while positioning the country in the higher value segment of the

international textile market. The companys goal is to satisfy customers through

technological superiority and synergic synchronization of man and machine, tailoring

quality products and services to harvest the reward of responsibility.

VALUES TO UPHOLD

Anlima Textile Ltd. holds the value to create a better future for the stakeholders of the

company, maintaining high standards of integrity, propriety and goodwill in shouldering

social responsibilities. To assimilate efficiency, innovation and state-of-the-art

technology for developing operational infrastructure and to establish linkages and

integration the company forwards its activities at achievable targets. The management of

the company also works to foster an environment conducive to grooming productive

talent and to forging mutually rewarding relationships with employees, clients and

society, based on the highest standard of professionalism.

GOALS TO PURSUE

The goal of the company is to satisfy customers through technological superiority and

synergic synchronization of man and machine, tailoring quality products and services to

harvest the reward of responsibility.

FINANCIAL OBJECTIVES

Business organizations are set up to fulfill objectives, or purposes. While specificobjectives vary from business to business, some general objectives are shared by mostbusinesses. Typical aims of profit-making organizations are:


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To make profit: Any surplus of income over expenditure is profit. The profit of abusiness is used in three basic ways-

Some profits are distributed to the owners of the business.

Some of the profit of the business must be paid to the government intax.

The reserves may be used to reinvest in the business, perhaps in newmachinery, for expansion, or to pay off loans.

To gain and enlarge a share of the market: The market for a product can beregional, national or international. Larger share of the market means more salesand greater profits.

To increase sales revenue: Increasing sales revenue without a correspondingincrease in costs generates a higher profit.

To provide a commercial or public service: A commercial product is one forwhich there is an effective demand that meets the needs of customers and iscompetitive with similar product of other business. To remain competitive, thebusiness must ensure the product continues to satisfy customer at a price they are

willingly to pay. A public service is one that is provided for the benefit of society.

Task 4

How does your chosen organization measure its financial performance in time to

time?


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As we all know that business organization measure its financial performance withfinancial ratio analysis. Even the credit controller is interested in a whole variety ofaccounting ratios, to build up, where possible, a broad picture of the customer. However,the credit controller is only interested in the accounts insofar as they affect a businesssability to its debt on time.

A problem with financial ratio analysis is that historical information about profit, assetsand liabilities is used for an assessment of a future cash flow position, when they offeronly uncertain guide.

Profit margin, asset turnover and return on capital employed

Profit margin

This is the ratio of profit to sales, and may also be called profit percentage.

Profit $20,000--------------- = --------------- = 20%

Sales $100,000This also means that its costs are 80% of sales. A high profit margin indicates that:

(a) Either costs are being kept well under control(b) And/or sales price are high

Net asset turnover

This is the ratio of sales in a year to the amount of net assets (capital) employed. AnlimaGroup has sales in 20X4 of $720,000 and has assets of $360,000 the net asset turnoverwill be:

Sale $720,000----------------------- = ---------------- = 2 timesCapital employed $360,000

This means that for every $1 of assets employed, the company can generate salesturnover of $2 per annum. To utilize assets more efficiently, manager should try to createa higher volume of sales for the same assets and so a higher turnover ratio.

Return on capital employed (ROCE)

This is amount of profit as a percentage of capital employed (i.e. net assets)


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(a) Profit $40,000----------------------- = --------------- = 16%Capital employed $250,000

(b) Profit Profit Sales

----------------------- = --------------- x -----------------------------Capital employed Sales Capital employed

(ROCE) (Profit margin) (Net asset turnover)

An increase in sales volumes can offset a decrease in profit margin, by increasing netasset turnover, while ROCE stays the same.

Changes in turnoverIt is also worth to commenting on the change in turnover from one year to the next.Strong sales growth will usually indicate volume growth as well as turnover increase due

to price rises, and volume growth is one sign of a prosperous company like Anlima.

Task 5

Describe the elements and nature of working capital of your chosen organization.


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The period of time which elapses between the point at which cash begins to be expended

on the production of a product and the collection of cash from a customer. Working

capital needs of Anlima Group also fluctuate during the year.

The amount of funds tied up in working capital would not typically be a constant figure

throughout the year. Only in the most unusual of businesses would there be a constant

need for working capital funding. For most businesses there would be weekly

fluctuations.

Many businesses operate in industries that have seasonal changes in demand. This means

that sales, stocks, debtors, etc. would be at higher levels at some predictable times of the

year than at others.

In principle, the working capital need of Anlima Group can be separated into two parts:

A fixed part, and

A fluctuating part

Figure : Working Capital Cycle


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Here, the whole mechanism of working capital cycle has been shown. The fixed part

remains always constant and the fluctuating part differs because of the various reasons.

Movement of liquid assets is one of the important reasons.

As Anlima Yarn Dyeing Ltd., Allied Enterprise Ltd., Anlima Build-Tech Ltd.Anlima Textile Ltd. has a huge working capital cycle. The company basically works ona credit basis so the level cash funds are low. Usually the payments are not taken inadvance but while making their own payments they tend to receive long-term credits.

This is why the companys working capital cycle is large.

The current portion of debt (payable within 19.5-20 months) is quite good, because itrepresents a long-term claim to current assets and is secured by long term assets.Common types of long-term debt are bank loans.An increase in working capital indicates that the business has either increased currentassets (that is received cash, or other current assets) or has decreased current liabilities.


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Task 6

What is operating cycle and calculate and comment on the average operating cycle

of your organization.

The focus of discussion of this segment of the report will be on the Operating Cycle orWCC of the Anlima Group. An elaborate WCC is pretty farfetched in the manufacturingindustry. Anlima Groups as we know a huge production company and so, it can beconsidered as an organization operating therefore the common concept for WCC asrepresented by the equation below applies effectively for Anlima Group.:

WCC = Average Raw Material in Stock Time Credit Period + Time Taken forProduction + Time the Finished Products Remain in Stock + Payback Periods ofCustomers.

During my meeting with Mr. Anwarul Islam the head of finance of Anlima Group Ilearned that the bank considers the following items (accounts) as their inventory:

Postage Material & Stamps Printed Stationery (Checkbooks, Deposit Slips, and Forms etc. etc.) Security Stationery Petty Stationery

Mr. Anwarul Islam said that although these are considered as stock or inventory the bankdirectly charge its clienteles for these items. Keeping that into mind the calculation ofAnlima Group WCC should be:

Average Raw Material in Stock Time - 2 months

(-) Credit Period - 1 month

(+) Time Taken for Production - 3 month

(+) Time the Finished Products Remain in Stock 1.5-2 month

(+) Payback Periods of Customers. 12 months

Working Capital Cycle - 19.5-20 months

Although the WCC calculation is showing an almost ridiculous figure for time taken tocomplete one cycle, we must not forget that the Operating Capital Concept is mostpopular for manufacturing companies. Yet, even with the absurd working capital cycle(Anlima). Seem to be currently in a very sound position of liquidity. The following tableis the Statement of Liquidity of Anlima Group Collected from the annual report of lastyear.


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Task 7

Describe the working capital financing strategies of your chosen organization.

Working Capital Management

Decisions relating to working capital and short term financing are referred to as workingcapital management. These involve managing the relationship between a firm's short-term assets and its short-term liabilities. The goal of Working capital management is toensure that the firm is able to continue its operations and that it has sufficient cash flow tosatisfy both maturing short-term debt and upcoming operational expenses.

Decision criteria

By definition, working capital management entails short term decisions - generally,relating to the next one year period - which is "reversible". These decisions are therefore

not taken on the same basis as Capital Investment Decisions (NPV or related, as above)rather they will be based on cash flows and / or profitability. One measure of cash flow is provided by the cash conversion cycle - thenet number of days from the outlay of cash for raw material to receiving paymentfrom the customer. As a management tool, this metric makes explicit the inter-relatedness of decisions relating to inventories, accounts receivable and payable,and cash. Because this number effectively corresponds to the time that the firm'scash is tied up in operations and unavailable for other activities, managementgenerally aims at a low net count. In this context, the most useful measure of profitability is Return oncapital (ROC). The result is shown as a percentage, determined by dividingrelevant income for the 12 months by capital employed; Return on equity (ROE)shows this result for the firm's shareholders. Firm value is enhanced when, andif, the return on capital, which results from working capital management,exceeds the cost of capital, which results from capital investment decisions asabove. ROC measures are therefore useful as a management tool, in that theylink short-term policy with long-term decision making.

Management of Working Capital

Guided by the above criteria, management will use a combination of policies andtechniques for the management of working capital. These policies aim at managing thecurrent assets (generally cash and cash equivalents, inventories and debtors) and theshort term financing, such that cash flows and returns are acceptable.

Cash management. Identify the cash balance which allows for thebusiness to meet day to day expenses, but reduces cash holding costs.

Inventory management. Identify the level of inventory which allows foruninterrupted production but reduces the investment in raw materials - andminimizes reordering costs - and hence increases cash flow; see Supply chain


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management; Just In Time (JIT); Economic order quantity (EOQ); Economicproduction quantity (EPQ).

Debtor Management. Identify the appropriate credit policy, i.e. creditterms which will attract customers, such that any impact on cash flows and the

cash conversion cycle will be offset by increased revenue and hence Return onCapital (orvice versa).

Short term financing. Identify the appropriate source of financing, giventhe cash conversion cycle: the inventory is ideally financed by credit granted bythe supplier; however, it may be necessary to utilize a bank loan (or overdraft),or to "convert debtors to cash" through "factoring".


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Task 8

What factors do your organization considers most in determining the cash

requirements.

Finance houses: Finance houses providing medium-term installment credit to thebusiness and personal sector. These are usually owned by business sector firms or byother financial intermediaries. They offer services similar to the clearing bank.

Bank loan:Bank loans are very flexible form of finance. Banks will consider applications for loanfor virtually any term, from a few months to several years. Bank loans to businesses arerarely for more than 7 years, unlike loans to individuals which can be for anything up to25 years in the case of a mortgage.

Interest on a bank loan can be fixed for the duration of the loan, particularly if the loan isshort-term. However, for longer-term loans, the interest is usually at a variable rate orfloating rate. Variable rate interest means that the interest payable is linked to areference interest rate, which is either the banks base rate or a money market interestrate.

Types of bank loanThere are various way of classifying loans:

Payment terms, e.g. installment versus single payment.

Period-of-payment terms, e.g. short-term versus intermediate-term or long-term.

In the manner of its security term, e.g. secured versus unsecured. In interest payment term, e.g. simple interest versus add-on, versus discount, versus

balloon.

Overdrafts:

With a bank overdraft, a bank allows a customer to pay more out of his current accountthan there is cash in the account. An overdraft is therefore a form of borrowing throughthe current account. The bank sets a limit to the size of the overdraft and the customer canbe overdrawn on the account up to agreed limit. The size of the overdraft continuallychanges, with payments into and out of the account reducing and increasing the balance.

Interest on an overdraft is usually charged at a daily rate on the overdraft balance, and therate is variable. Overdraft is repayable on demand unlike for private individuals, businesspay and arrangement fee on an overdraft. This is in addition to the overdraft interest andis charged for setting up the overdraft facilities.

There are two types of overdraft facilities:

Committed.


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Uncommitted.

With a committed facility the bank agrees to allow the customer to be overdrawn up tothe agreed limit, at any time during the agreed period of time.

With a uncommitted facility bank agrees to allow the customer to be overdrawn up to theagreed limit, but reserves the right to reduce overdraft limit, or withdraw the overdraftfacility completely, at any time and without notice.

Secured and unsecured loans:Loans and overdrafts can be either secured or unsecured. Borrowing is secured when the bank takes security for the money it lends. For companies that borrow, security isprovided in the form of a charge over its assets.

Loan terms and conditions:The term and condition of a loan arrangement or an overdraft arrangement can vary

considerably. Every arrangement should specify: The term of the agreement.

The amount of the loan or overdraft limit.

The interest rate payable.

The frequency of interest payment.

For a loan, the agreement will specify whether the loan principal is to be repaid graduallyover the term of the loan, or whether there will be no principal repayments until the endof the loan period.

A loan or overdraft agreement will also have other terms and conditions. Most of these

related to undertakings given by the borrowers to the bank.

If a loan is unsecured the borrower might be required to give an undertaking that hewill not subsequently take out any secured loans from any other lender.

The borrower might give an undertaking to provide the bank with regular informationabout the financial position, such as a profit and loss account very six months or aregular cash budget or cash forecast.

A borrower might also give undertakings to keep its financial position acceptable tothe bank. For example, the borrower might undertake that its current assets will alwaysbe at least twice the amount of its current liabilities.

Any such financial ratios in a loan agreement will be continually monitored by thebank.

Factoring is a word often misused synonymously with accounts receivable financing.Factoring is a financial transaction whereby a business sells its accounts receivable (i.e.,invoices) at a discount. Factoring differs from a bank loan in three main ways. First, theemphasis is on the value of the receivables, not the firms credit worthiness. Secondly,


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factoring is not a loan it is the purchase of an asset (the receivable). Finally, a bank loaninvolves two parties whereas factoring involves three.NB: In Europe the term Factoring typically mean accounts receivable financing. Here thecorrect word for this article is:American factoring.The three parties directly involved are: the seller, debtor, and the factor. The seller is

owed money (usually for work performed or goods sold) by the second party, the debtor.The seller then sells one or more of its invoices at a discount to the third party, thespecialized financial organization (aka the factor) to obtain cash. The debtor then directlypays the factor the full value of the invoice.company sells its invoices, even at a discount to their face value, when it calculates that itwill be better off using the proceeds to bolster its own growth than it would be byeffectively functioning as its "customer's bank." In other words, it figures that the returnon the proceeds will exceed the income on the receivables.

Task 9What factors do your organization considers most in determining the requirements

of working capital other than cash.

Anlima Group considers three areas of business where managers have the most directimpact:

accounts receivable (current asset) inventory (current assets), and accounts payable (current liability)

Accounts Receivable

Accounts receivable are generated when a firm offers credit to its customers.The first thing that needs to be addressed when establishing a credit policy is to set thestandards by which a firm is judged in determining whether or not credit will beextended. There is whats known as the 5 Cs of credit:

1. Character the willingness of the borrower to repay the obligation2. Capacity the capability of the borrower to earn the money to repay theobligation3. Capital sufficient assets available to support operations (as opposed toa firm that is undercapitalized). Sometimes capital is interpreted to meanequity capital; i.e., to make sure the owners of the firm have sufficient moneyat stake to give them proper incentive to repay the loan and not let thecompany go bankrupt.4. Collateral assets to support the loan which can be liquidated if defaultoccurs5. Conditions current and future anticipated conditions of the firm and theindustry.


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Once the credit standards have been set, the terms of credit need to beestablished. When must the customer pay? If they pay early, will they receive adiscount? If they pay late, do they get charged a penalty?

While the whole purpose of extending credit is to increase sales and, thus, grossprofits, the expected increase in gross profits must be compared with the costs

associated with extending credit to customers.These costs include-

The time value of money tied up in accounts receivable

Bad debts that occur

Credit checks (to minimize bad debts)

Collection costs

Discounts for early payment (reduces revenues)

Clerical costs associated with maintaining a credit department

Competitors will respond very quickly to a change in price. How many times

have we seen the claims that We will meet or beat any advertised price? A change incredit policy, on the other hand, is a more subtle means of competing for customers andone that the competition will not necessarily respond to. In fact, many firms base theirbusiness on easy credit. How many times have we seen the advertisements where theytell us Good credit? Bad credit? No credit? We dont care! Of course, these firms willhave larger bad debt expenses and larger financing costs, etc. Obviously, they will alsoneed to have higher prices (higher gross profit margins) in order to cover these costs.

Inventories

Inventories (raw materials, work-in-process, finished goods) make up a large

portion of most firms current assets, and for many, total assets. As such, the extent towhich a firm efficiently manages its inventories can have a large influence on itsprofitability. Thus, keeping abreast of inventory policy is critical to the profitability (andvalue) of the firm.

Several factors influence the amount of inventory that a firm maintains. The mostimportant of these include

Level of sales typically, the more sales a firm has, the more inventory itholds

Length of time and technical nature of the production process Thelonger it takes to produce finished goods inventories from raw materials, the

larger the amount of finished goods that a firm will typically hold (a safetystock). Also, if the production process is highly technical, requiring thatretooling be performed prior to each production run in order to assure thatproduction is meeting specifications, larger amounts of inventory will beproduced with each production run in order to minimize the set-up costsassociated with retooling.


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Durability vs. Perish ability If an inventory item is highly perishable, suchas fresh vegetables, a small amount will be held. Similarly, fashions ofclothes and car styles are perishable and will result in smaller inventoriesthan durable goods such as tools and hardware.

Costs Cost of holding inventories as well as costs of obtaininginventories will influence inventory sizes.

Inventory costs can be broken down into three major categories:

A. Ordering Costs1. Fixed costs stocking, clerical2. Shipping costs often fixed3. Missed quantity discounts an opportunity cost

B. Carrying Costs1. Time value of money tied-up in inventories2. Warehousing costs

3. Insurance4. Handling5. Obsolescence, breakage, shrinkage

C. Stock-out Costs1. Lost sales2. Loss of goodwill3. Special shipping costs

Ideally, we want to balance these costs against each other so that our total costsare minimized.

Account payable:

any amount owed by a company as the result of a purchase of goods or services fromanother company on a credit basis. Under a trade-credit arrangement, the purchasingcompany, after placing its order with the seller, receives the goods and an invoicedenoting the price of the goods and the terms for payment. The purchasing firm does notsend a trade acceptance or promissory note for payment but enters the amount owed as acurrent liability in its accounts.

Companies incur this type of short-term debt primarily to finance their inventories; ifinventory turnover is rapid within an industry, a company may be expected to have largeaccounts payable. Within any given industry, smaller companies are more likely to makeuse of this type of trade credit because they are less able to pay cash and take advantageof discounts than larger companies and have fewer sources of credit open to them.

Documents

Final Report (F9) Unit 10 LO1-2