Marketing Finance01 1

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BESs IMSR Marketing Finance

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MARKETING FINANCE

Name: Pragati. Uparkar

Roll No: 53

Q1) a. Impact of Account Receivables on Marketing Cost?

Cash In hand almost immediately:The importance of cash in hand cannot be overstated. It is critical for any successful venture with the

hopes of growth, as even one month can make a large difference for small business. Operating cash is a

true reflection of cash flow which can be use in a numerous ways to advance a company. Cash is vital to

take a company into new growth markets, pay out to the investors in the form of dividends, pay suppliers

and employees, cover overhead and capitalize on business opportunities quickly and contract confidently.

No Compromise to the Balance Sheet (No Debt):Using your account receivables does not create a debt issue for the company that must be serviced and ties

up assets that may be used elsewhere. There is no loan, therefore, no debt to repay. And if the company

has previously pledged assets or wishes to in the future, there is no impediment. Without debt the

companys financial ratios are better which are often used to determine credit worthiness in obtaining

other types of financing. Your balance sheet is more attractive and your financial stage is morestrengthened.

No Financial statements required or credit analysis :In most cases, no business or personal financial statements or tax returns are requested. Clean personal

credit is not required nor is a clean business history. It is the credit worthiness of the company paying you

that is of greater importance and no debt is created and therefore no debt service.

No Minimum Volume requirements or No Long Term Agreements:You have the freedom to choose to utilize all or a portion of your account receivables. The rate may vary

accordingly but you are in control as to your requirements.


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Invoice Processing:You can eliminate the overhead cost associated with having internal staff handling processing and

collections. Because factors handle much of the work, you can greatly reduce the cost of processing both

invoices and potentially, the payables role.

Increased Productivity:Business Owners often spend more than half of their time on duties that do not appreciate the company or

produce revenue, such as collections, administration, book keeping, warding off creditors or searching for

additional capital. We can help eliminate time spent on these activities.

Reduced Accounting Cost:As a client you can receive information regarding outstanding and paid accounts on a daily, weekly and

monthly basis. Most factors have online reporting options that keep clients up to date on the collection and

aging of their receivables. While we take over the burden, the control is still your business.

b. Impact of Inventory levels on marketing cost

Inventory (or stockholding) can be described as the accumulation of an assortment of items

today for the purpose of providing protection against what may occur tomorrow. An inventory

is maintained to increase profitability through manufacturing and marketing support.

Manufacturing support is provided through two types of inventory system:

An inventory of the materials for production; An inventory of spare and repair parts for maintaining production equipment.

Similarly, marketing support is provided through:

Inventories of the finished product; Spare and repair parts that support the product.

If supply and demand could be perfectly coordinated, there would be no need for companies to

hold stock. However, future demand is uncertain, as is reliability of supply. Hence inventories


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are accumulated to ensure availability of raw materials, spare parts and finished goods. Generally

speaking, inventories are kept by companies because they:

Act as a hedge against contingencies (e.g. unexpected demand, machinery breakdown); Act as a hedge against inflation, price or exchange rate fluctuations; Assist purchasing economies; Assist transportation economies Assist production economies; Improve the level of customer service by providing greater stock availability.

Q2) What is Account Receivables?

Accounts receivable also known as Debtors, is money owed to a business by its clients

(customers) and shown on its Balance Sheet as an asset. It is one of a series of accounting

transactions dealing with the billing of a customer for goods and services that the customer has

ordered. Accounts receivable represents money owed by entities to the firm on the sale of

products or services on credit. In most business entities, accounts receivable is typically executed

by generating an invoice and either mailing or electronically delivering it to the customer, who,

in turn, must pay it within an established timeframe, called credit terms orpayment terms.

The accounts receivable departments use the sales ledger, this is because a sales ledger normally records:

- The sales a business has made.

- The amount of money received for goods or services.

- The amount of money owed at the end of each month varies (debtors).

Q3) What is Inventory?

Inventory is the total amount of goods and/or materials contained in a store or factory at any

given time. Store owners need to know the precise number of items on their shelves and storage

areas in order to place orders or control losses. Factory managers need to know how many units

of their products are available for customer orders. Restaurants need to order more food based on

their current supplies and menu needs. All of these businesses rely on an inventory count to

provide answers.
http://en.wikipedia.org/wiki/Accountinghttp://en.wikipedia.org/wiki/Customerhttp://en.wikipedia.org/wiki/Good_%28economics%29http://en.wikipedia.org/wiki/Service_%28economics%29http://en.wikipedia.org/wiki/Invoicehttp://en.wikipedia.org/wiki/Electronic_billinghttp://www.wisegeek.com/what-is-an-inventory-count.htmhttp://www.wisegeek.com/what-is-an-inventory-count.htmhttp://en.wikipedia.org/wiki/Electronic_billinghttp://en.wikipedia.org/wiki/Invoicehttp://en.wikipedia.org/wiki/Service_%28economics%29http://en.wikipedia.org/wiki/Good_%28economics%29http://en.wikipedia.org/wiki/Customerhttp://en.wikipedia.org/wiki/Accounting


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The word 'inventory' can refer to both the total amount of goods and the act of counting them.

Many companies take an inventory of their supplies on a regular basis in order to avoid running

out of popular items. Others take an inventory to insure the number of items ordered matches the

actual number of items counted physically. Shortages or overages after an inventory can indicate

a problem with theft (called 'shrinkage' in retail circles) or inaccurate accounting practices.

Q4) a)Different cost associated with Account Receivables?

The various types of costs associated with receivables management are

(a) Collection cost

(b) Capital cost

(c )De l inquency cos t

( d ) De f a u l t c o s t .

(a) Collection Cost: - These are costs incurred in collecting receivables mainly

includes costs of maintaining credit department and expanses involved in acquiring credit

information.

(b) Capital Cost: -These are the cost incurred to arrange the funds to be invested in receivables.

Therefore cost on the use of additional capital to support credit sales which alternatively could

be profitably employed elsewhere is a part of the cost extending credit receivables.

(c)Delinquency Cost: -S u c h c o s t s a r i s e o u t o f t h e f a i l u r e o f t h e

customers to meet their obligations. The major components of these types of

cost s are cost s incurred on collection effo rt cost of capital legal charges etc.

(d) Default Cost: - Such types of cost mainly includes bad debts.

b)Different cost associated with Inventory?

Costs of Ordering or Costs of Acquisition: For a large organization, it becomes necessary tohave a separate purchase office to purchase thousands of items. The demands received

are technically scrutinized and for purchasing them, inquiries are issued, tenders are

received and evaluated, orders are progressed, materials are received and inspected and

lastly, the payments are arranged. All these mean additional costs to the organization. All

these costs together constitute what is called cost of ordering or cost of acquisition.


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Inventory Carrying Costs:The very fact that the items are required to be kept in stockmeans additional expenditure to the organization. The different elements of costs

involved in holding inventory are as follows:

(a) Interest on capital / cost of capital / opportunity costs: When materials are kept in

stock money representing the value of materials is blocked. In a developing economy,

capital is extremely scarce and as such, the real value of capital is much higher than the

nominal rate of interest which the organization like Railways may be paying. The, money

which is blocked up is not available to the organization to do more business or to use it

for alternative productive investment. This opportunity to earn more profits which we

lose can be expressed as opportunity cost.

While working out the inventory carrying cost in an organization, the higher of the threefactors viz., interest, cost of capital or opportunity cost should, be taken into

consideration. This may be roughly 20% per annum.

(b) Obsolescence and depreciation: The costs because of obsolescence and

depreciation are very important even though they are very difficult to assess. This factor

is relatively higher for spare parts inventory as against raw material inventory. Largerthe stock we keep more the risk of obsolescence and as such, the costs are expressed as

the percentage costs to the average inventory holding and can be between 2 to 5%.

(c) The cost of storage, handling and stock verification: There are additional costs

because of the clerical work involved in handling of materials in the ward, in stock

verification, in preservation of materials as well as the costs because of various

equipments and facilities created for the purpose of materials. A part of this cost is of a

fixed nature. The major portion of the cost including the cost of staff, however, can be

treated as variable costs at least in the long run. This cost can be roughly 3 to 5% of the

inventory holding.


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Shortage or Stock out Costs: Whenever an item is out of stock and as such cannot besupplied, it means that some work or the other is delayed and this, in turn, leads to

financial loss associated with such stoppage or delay of work.

For example, if a locomotive remains idle for want of spare parts, the earning capacity ofthe locomotive is lost for the duration of this period. On the other hand, the spare parts

required will have to be purchased on emergency basis or have to be specially

manufactured resulting in additional costs.

Stock out costs can vary from item to item and from situation to situation depending uponthe emergency action possible. No attempt therefore, is normally made to evaluate a

stock out cost of an item. Nevertheless, it is important to understand the concept of stock

out costs, even though the actual quantification is not possible. We should have a roughgrading of the items depending upon the possible stock out costs.

Systems Costs: These are the costs which are associated with the nature of the controlsystems selected. If a very sophisticated model of the relationship between stock out

costs, inventory holding cost and cost of ordering is used and operated with the help of a

computer, it may give the theoretical minimum of the other costs but the cost of such

control system may be sufficiently high to offset the advantages achieved.

In most of the situations, however, there is no substantial increase in costs because of theproposed control system and in such cases, these costs can be overlooked.

Q5) a) Advantages of High Inventory:

(a) High Stocks of Raw Materials

(i) Bulk purchase at cheaper rate with quantity discount. [Better, if bulk annual purchase is

ordered, but the delivery and payments are to be made in phases, to the mutual advantages

of both the parties. It is an optimal strategy).

(ii) Seasonal purchases, being cheaper and sure.

(iii) No Stock-out cost and risk.

(iv) In inflationary economy, it may be gainful.

(v) Savings of ordering cost and the connected hazels of loading and unloading, etc.


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(b) High Stocks of Finished Goods:

(i) It may facilitate instant delivery, out of the shelf, and, thus, to have an edge over the

competitors. [But, better to have only a small ready stock and the rest to be produced on receipt

of the order, on priority basis].

(ii) Thus, the "Golden Mean" is the most basic management mantra, pertaining to the

management of inventory, too.

Disadvantages of High Inventory:

1) Risk: - If you keep a large inventory on-hand and one of the products is

unpopular/discontinued/dangerous you could easily end up with a very expensive pile of stuff

that is very difficult to unload.

2) Cost: - Maintaining a large inventory requires storage space, management systems, and

personnel to track it. Just buying labels for a large inventory control system can get expensive.

Every square- or cubic-foot of inventory has a cost associated with it, and maintaining a large

inventory will mean a larger cost than a small inventory.

Of course, a larger amount of stock on-hand means that you will be in a position to gain from

sudden rushes on products, and to make sales when competitors who maintain JIT inventory

systems are scrambling to catch up.

b) Advantages of Low Inventory:

1. The advantage of holding low levels of raw materials is that you do not have to have a largewarehouse and holding costs of the inventory.

2. It is generally accepted that inventory can make up as large as 20 % of the costs. There is nospoilage and no loss of inventory.

3. If you are using low levels of inventory then you need to have good communication with thesupplier otherwise you will not be able to get inventory on time for production.
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4. Low levels of inventory cannot provide you with a cushion in case there is a surge in demandor there is no availability of the raw materials. In case there is some problem due to spoilage,

there is no extra raw material to cover up for it.

Disadvantages of Low Inventory:

1. Inventory managers tend to concentrate on keeping inventory levels low. They do this inorder to avoid the month to month carrying charges. However, in doing so, they may actually

be doing more harm than good.

2. They are not using their economies of scale to negotiate the best possible pricing. In addition,they may not be maximizing their per unit freight cost for incoming parts and materials.

3.

Not using your purchasing power to your advantage. By doing these you now have theburden of paying more invoices and cutting more checks. You are not getting the best pricing

for your volume.
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Marketing Finance01 1