Assignment On

,

Managing Finances
Focusing On,

Surplus funds and liquidity management, Working capital management, Credit granting and debt collection.

I felt lots of limitations on doing the study in practical manner. Working capital management. 2008 Mir Mohammad Fakhrul Islam Senior Lecturer Bangladesh Institute of Management Studies Dhaka. I therefore. Sarker Asif Iqbal ID No. Yours sincerely. Credit granting and debt collection procedures’ in a company of my choice. With due respect and humble submission. I have completed my report on ‘Surplus funds and liquidity management. hope that you will do your kind judgment in the report and give advice me to make reports better in future.: 1312 .Letter of transmittal 7th September. This report has been prepared as a partial fulfillment of the degree BTEC Higher National Diploma. I have tried my level best to complete the study according to our class room discussions. I expect your kind judgment on the report considering the limitations. Dear Sir. I would like to state that. Bangladesh.

I would like to render my thankfulness to ‘Hoda Vasi Chowdhury & Co’. . Then I would like to thank my parents who motivated and gave me inspiration to be with the course as well as the report. Samiur Rashid and Program Director Mr.Acknowledgement I would like to start by showing my gratitude to Almighty Allah for the successful completion of the report on ‘Managing Finance’. I am grateful to the management of the ‘Maksons Spinning Mills Limited’ for giving me the opportunity to work with their data to complete my report. Mir Mohammad Fakhrul Islam for making nice class room discussions and presentations on the report. I am also grateful to our course teacher Mr. I would like to give my heartfelt gratitude to our venerated and esteemed Vice President Mr. I will conclude by thanking all the staffs of Bangladesh Institute of Management Studies for all the support throughout the course. Rishad Hossain for allowing and advising me to do such a nice course as well as report. Finally I would like to thank our course mates for the nice discussions regarding the report. for providing their audit report-2007 on ‘Maksons Spinning Mills Limited’.

Working capital management is concerned with the efficient management of current assets and current liabilities.Working capital management Working capital is the long-term capital needed to finance current assets. Extra finance cost for keeping too much working capital. Fluctuating working capital: It refers to working capital in excess of the minimum. The cash cycle/operating cycle should not be too long (inefficient management) but should not be unreasonably short. These are. The need for working capital varies according to changes in the trade cycle. The cost of finance. . Investment in current assets depends on. Permanent working capital: This is a minimum level of working capital that a business always needs. We can divide working capital into two parts. .Conservative attitude aims to keep an adequate working capital investment. The cost of lost production and sales from having too few current assets. That is they maintain a ration between current assets and current liabilities. Financing working capital Working capital is financed keeping two key terms in mind. (1) The amount of investment in current assets. It could be long-term capital or current liabilities. There are two management attitudes towards taking risk: .Aggressive attitude to working capital management which seeks to have minimal working capital investment in order to maximize ROCE. Length of the working capital cash cycle or operating cycle. Working capital of a company could be calculated by subtracting current liabilities from current assets of the company. (2) The source of finance of the investment.

639 54.12.417 - 826.604 256.609 46.796 218.030 851.986.694.975 - 4.694.606 1.000 136.062.000 10.260.933. Plant & Equipment net of accumulated depreciation Current Assets Inventories Accounts Receivable(Trade Debtors) Investment Advance.000 12.431 24.05 Taka 54.000 82.156 914.652.414 115.000 .562.113.197 30.834.110. BALANCE SHEET AS ON 31 DECEMBER 2007 Particulars ASSETS Non-Current Assets Property.04 Taka 9.564 855.151 407.006.000.277.733 1.099.255.140.580.161 326.348.510.975 3.191 840.209 113.509 971.049 70.983 238.614 72.551.488 624.493 8.385 1.841.061 31.07 Taka 840.488 238.110.220.07 Taka 851.028 70.196 578.000.604 1.09.091.09.191 30.000 136.020.094.384.000 60.091.640 108.224.276.267 60.767 366.The balance sheet of Maksons Spinning Mills Limited is given below.000 66.000.568.782 566.834.614 762.948 30.351.492 250.000.430 66.816.905 1.025 9.701.277.267 16.454.988 21.048.580 10.000.480.999.020.617. Deposit & Prepayments Cash & Bank Balances TOTAL ASSETS EQUITY AND LIABILITIES Shareholders' Equity Share Capital Reserve & Surplus Non -current Liabilities Long Term Loan Current Liabilities Trade and Other Payables Deferred liability WPPF Current Portion of Long Term Loan Short Term Loan Liabilities for Expenses TOTAL EQUITY 31.025 860.084.018 71.614 12.000.819 366.309.486.094.578 - 17.110.000.510.197 54.551.547 1.000 4.260.000.124 1.948 720.024.704 797.06 Taka 720.168 293.614 10.330 782.508.416 21.107.276.477 136.283.701.540.649.556.09.178.419.110.030 30.742.983 100.499.694.136.689 19.136.09.000 8.032 72.377.649.113.000 272.942 971.448.767 190.872.819 1.168 190.140.547 293.084.000 10.395 64.924 35.872.319 65.000 117.309.

A business must be able to pay its liabilities when they fall due. They have negative working capital which means they are taking high risk to get higher return.665.89 million that means 50% of sales proceeds remained unrealized.301.30 million against the yearly sales of Tk. It must therefore have sufficient liquidity to sustain its business operations The main sources of liquidity are: . In December ’07 debtor balance was Tk. 1160.803 Tk. They are following aggressive funding policy.Short-term marketable investments Liquidity in a company is measured using the following ratios. The payment of back-to-back L/C is made by the opening bank after realization of payment of master/export L/C. In 30 September 2005 they have working capital of 5.477 Tk.An unused bank overdraft facility . It takes 150 days or even more to realize the payment.264. .Trading operations.315 Tk. they seek maximum use of short-term finance in order to minimize working capital investment. selling its product through 120 days deferred back to back L/Cs but the payment of these L/Cs is not always made on due maturity date.604 Tk.98 million in December ’07 which reflected financial activity rather than operating activity. Otherwise it will eventually be unable to continue in business. .723.” Managing working capital Liquidity: Liquidity is having cash or ready access to sources of cash. Short term loan was Tk. Maksons Spinning Mills Limited is a 100% export oriented spinning industry.201. In recent years the company is in too high liability. Generally. That is. They are financing their current assets using long-term loan and short term loan. “Cash Flows from Operating Activities Negative cash flow from operating activity is mostly attributable to delay in collection of sales proceeds against export. Al-haj Abdul Ali. 578. In 30 September 2006 they have working capital of – 373. We are availing of short term financing against the bills of these BTB L/Cs. Liquidity is important. 401. According to the chairman and director Mr. 2007 they have working capital of . On the other hand Cash Flow Statement furnished for 3 months period whereas 120 days deferred BTB L/Cs received in this period were not realized which also caused negative cash flow. long-term finance is more expensive than short term finance and financing of current assets by trade payables has no cost but using long-term finance to fund current assets generally has lower risk.AND LIABILITIES In 31 December 2007 they have working capital of . In 30 September.742.

lies as deferred liability.18 Crore yet to mature. If we recalculate current and quick ratio not considering afore said amount then the current and quick ratio will be 1. unless inventory is not a liquid asset. 1.20 Crore were made by creating syndicated long term loan. If the inventory is liquid then quick ratio gives a better result.81 30/09/2007 0.94 respectively. Al-haj Abdul Ali.37 Crore against 360 days deferred L/C. Tk. At the time of maturity of these L/C’s the payment of Tk.47 6.95 Crore as current liability caused poor current and quick ratio.40 30/09/2005 1.0 for the quick ratio.08 Liquidity ratios should not be too high (excessive investment in working capital) or too low (risk of inability to pay liabilities on time). 3. 22.70 respectively but the actual scenario is quite different.73 30/09/2006 0.” . Both ratios are important for a company. Changes in the value of these ratios give signal to company.43 Crore by creating short term loan and Tk.Current ratio = Quick ratio (acid test ratio) =  These ratios are used to monitor liquidity.43. These ‘ideal’ liquidity ratios are not reliable guides. 3. The inclusion of short term loan of Tk. 22.70 0.56 Crore from own source. Liquidity in Maksons Spinning Mills Limited. We have imported capital machinery of Tk. because acceptable or normal liquidity ratios vary considerably between different types of business. The current ratio is the main indicator of liquidity. 1. ‘Traditional’ values for ‘ideal’ liquidity ratios are 2.47 30/09/2004 6. Liquidity Ratios Current Ratio Quick Ratio Formula Current Asset/Current Liability Total current assets less inventory/Current Liability 31/12/2007 0. that the installments of Tk. Besides. 1.43 Crore & deferred liability of Tk. Since this amount will be payable in the next financial year.95 Crore.18 Crore against capital machinery and current portion of long term loan of Tk. Rest Tk.09 and 0.08 0.0 for the current ratio and 1. According to the chairman and director Mr.81 & 0. which will fall due during the period from 01 October 2007 to 31 December 2007 are transferred from long term loan to current liability as per requirement of Para 60(b) of BAS 1 “Presentation of Financial Statements”. 70. “Current and Quick Ratio The Current and Quick ratio of the Company are 0.68 0.30 1.

414 . Non-operating income Profit before financial expense & WPPF 1.385.436 190.543 17.07 Taka 260.198 8.466.957 6.09.555.06 to 30.078.894.374 63.414 Days A B C A+B+C Days X Y (Z) X+Y-Z 17.07 to 31. Cash cycle starts with paying out cash to suppliers for materials and ends with receiving cash from customers for the goods (or services) sold.077.10.490 246.280 830.10. Operating cycle Raw materials: average inventory turnover period Production cycle time (WIP turnover period) Finished goods: average inventory turnover time Operating cycle Cash cycle Operating cycle Average time to collect payment from customers Average credit period taken from suppliers Cash cycle Operating ratios are as follows.945 23.711.755.07 Taka 1.362 1.098. Operating cycle starts with obtaining materials from suppliers and ends with selling goods to customers.208.06 to 30.155.103.06 Taka 129.210 61.05.902 105.135.975 16. Inventory Turnover period = Receivables payment period = Payables turnover period = The statement of operating results of the company as follows: Particulars Sales less Cost of Goods sold Gross profit Less Administrative & Selling Expense Operating Profit Add.09.402 213.988 2.227.790 33.573 92.385.12.Cash cycle or operating cycle This is the Repetitive cycle of business operations.238 69.483.234.423.759.217 213.939. According to the formula.

605 65.975.608.06 Taka 250.000.271) (158.224.000.556.590 1.760 149.911 8.000.09.896.825) (58.07 Taka 1.600 6.662.857.403.878) (58.032 407.299.039.553.07 Taka 16.282 16.05.047.029.825) 59.000.354) (204.000 70.300) 66.480 16.000) 90.598 (273.734.905 24.282) (69.419.06 to 30.933.943.457.237.062) (7.715.07 to 31.274 36.733) (149.380.272.784 223.080 801.000) (205.623 1.565.509 .10.983 3.232.397 782.175.224.12.973.831.382) 640.442.878) (1.129.000 784.119 782.727.06 to 30.727.906 (2.092 (1.884.160 60.837.929.Less Financial Expense Net Profit before WPPF Provision for WPPF Net profit before tax holiday reserve Tax holiday Reserve Profit Available for Appropriation Cash Flow Statement Particulars CASH FLOW FROM OPERATING ACTIVITIES: Cash Received from Turnover and Others Payment for Cost and Expenses Interest Paid Net Cash Generated from Operating Activities CASH FLOW FROM INVESTING ACTIVITIES: Acquisition of Fixed Assets Investment in Associate Net Cash used in Investing Activities CASH FLOW FROM FINANCING ACTIVITIES: Dividend Paid Share Capital Short Term Loan from Bank Long Term Loan Net Cash Generated from Financing Activities Net Cash Inflow / (Outflow) Opening Cash & Bank Balances Closing Cash & Bank Balances 46.548.712.610) 3.698) (46.923 167.393 4.171.630) (768.715.990.345 3.10.877) (3.382 8.837.411.277 (41.136) 38.532.493 132.09.630 63.140.794.403.049 8.509 66.259.436 (3.680) (8.382) (167.291.840 9.256.617.572 (20.546 20.185 24.237.477) (10.377.

If the average debt collection period gets longer.06 to 30.07 0.06 7.06 to 30. . then it might indicate slow-moving stock.6 months 0.09.10. this might indicate poor management of debt collection procedures.5 months 25 months Inventory should not be held longer than necessary. Credit terms to both customers and suppliers should be managed adequately to satisfy both groups. Operating ratios Formula Inventory Turnover period Receivables payment period Payables turnover period (Average inventory/Cost of goods sold) x 365 days (Average receivables/Credit sales) x 365 days (Average payables/ Cost of goods sold) x 365 days 1. If the operating cycle is too long.09.4 months 1.07 to 31.05. because cost occurs to hold inventories. inefficient store management or inefficient buying.5 months 27 months 6. Working capital and the cash cycle A longer operating or cash cycle represents a bigger investment in working capital. If inventory turnover gets longer.7 months 16. Managing the operating cycle is therefore a matter of managing ‘turnover’ times for inventory. this means excessive investment in working capital or inefficient investment or inadequate investment.Operating ratios in the company.4 months N/A 4.07 7.12.10. Inventory turnover times should be managed adequately. The average investment required in working capital can be calculated from average turnover periods in the cash cycle. Monitoring the operating cycle The operating cycle should be monitored effectively. receivables (debtors) and trade payables (trade creditors). Inventory turnover time varies company to company.

   The purchase price per unit is the same regardless of order size. it also sets an optimum average inventory level and an optimum inventory turnover period. In that case ordering costs will be high. There are no discounts for large orders or bulk purchase. holding items of inventory is wasteful. CO = the cost of making an order for the item D = annual demand in units CH = the annual cost of holding one unit of the item in inventory Assumptions used in the EOQ model In calculating or applying EOQ model some assumptions are used. These are. It establishes an optimum size for purchase orders. The formula to calculate EOQ is given below. In doing so. Inventory holding costs should be 0 or close to 0. The consumption of the inventory item is at a constant rate. A very good working relationship with the supplier is essential. A new supply is received as soon as the inventory level falls to zero. It is only possible with the key suppliers of the company. These are. It’s an inventory management tool. EOQ = Where. In JIT situation it is thought that. Annual holding costs and annual ordering costs  When the order size Q is the EOQ. 1) Just in time purchasing Just in time purchasing means items or goods should be purchased for delivery at exactly the time they are needed. and there may be large savings in stores’ department running costs. .Economic Order Quantity (EOQ) Economic Order Quantity model (EOQ model) is a technique for minimizing inventory costs. It ties up capital for no return. The inventory level therefore ranges between a maximum = EOQ and a minimum = 0. annual inventory holding costs = annual ordering costs  Annual holding cost = (Q/2) x CH  Annual ordering costs = (D/Q) x CO  When Q = EOQ. Costs are minimized by minimizing the combined cost of inventory holding costs and ordering costs. (Q/2) x CH = (D/Q) x CO Just in time (JIT) Just in time (JIT) is divided into two portions. The ideal level of inventory is usually taken as zero.

banks from which the company took short term and long-term loans. That the total capital which includes the loan capital and equity capital that is needed to operate the company to achieve the company’s objectives or goals. Key categories that are to be considered when assessing the credit-worthiness of a customer Capital: When a company deals with credit the total capital of the company takes the first priority. That is it aims to improved labor productivity. The administrative expense will also increase. then potential investors may not want to invest anymore in the company in the fear of not getting the loan back.2) Just in time production It is similar in concept to just in time purchasing. 4) It is needed to keep balance between credit and cash. Items should be produced for selling to customers at exactly the time they are needed. 3) It is needed to monitor to minimize the chance of becoming insolvent in front of the suppliers. Aims of Just in time management The main aim to JIT is. which the company will not definitely want. It also aims to vary order quantities and batch sizes to meet demand of products. efficiency in the supply of materials and efficiency in production is essential. It also . The cost of taking debt will increase. The ideal level of inventory is zero. For the company the creditors of the company are the suppliers. Otherwise creditors may charge higher amount for taking the loan for higher period. It is also needed to keep a balance between time of taking credit and giving credit. Bottlenecks in production and machine breakdowns must be avoided to supply the goods to customers on due time as per specification. It also aims to make stronger relationship between buyer and supplier. To meet the demand. Risk of taking increased credit First of all the company will lose their goodwill for taking increased credit. Creditors of the company are needed to be monitored for the following 1) It is needed to monitor the liquidity position of the company. It will save cost of holding inventories. If the credit taken by the company increases too much in against of the equity then the company may go for forced liquidation. Maximum efficiency is required in production to ensure that production happens on time. 2) The company needs to pay back the debt in due time. Efficiency also eliminates waste and therefore reduces costs. There should be a balance between total credit taken by the company and total equity available to payback those debt. If the company takes credit at an increased rate without paying the old debts back. It reduces the number of accounting transactions. Need to monitor creditors of the company Creditors are those who provide short-term or long term loans to business. eliminate inventories as holding inventory is expensive.

External sources  Banks  Trade references  Credit rating agencies  Press coverage Techniques applied by the organisation that may be used to assist in the collection of overdue debts are Firstly the company will remind the credit terms to the customer. .It issues invoices for the clients and takes control over the administration of the company and administers the company. It sends invoices showing the name of the factor. It is needed to be a matter of thinking that whether the company needed to take the debt or not. It gives a measurement to the ability to pay regular installment including interests for taking the loan.It provides insurance to the client against the bad debt. Usually a factor provides three services to its clients. by doing phone call or by visiting the customer self. It includes the debt-equity ratio of the company. These are. They will try to collect this historical information from the previous loan givers of the company. financial institutions etc. Even the company can give a reminder to the customer before the dead line. Then it comes to capacity of using the loan taken by the company. If a company takes a loan then the company must have the capacity to use the loan in a productive to earn profit.Internal sources  Financial and accounting analysis  Customer visits  Credit control information . .It lends or pays advance cash up to 80% to its clients. Factoring A factor is a financial institution that collects debt on behalf of the company. Cash flow: It relates to the regular cash inflow and outflow of the company. A factor is very much experienced in collecting debt and administration of receivables. which fasters the debt collection procedure. By appointing a factor the company can save some . Internal and external sources of information to be used in assessing the credit-worthiness . If the company does not get any response from the customer then the company can chase the late payers by issuing reminders.- - - measures that the ability of taking amount of credit by the company. Capability: Capability includes the purpose of taking the debt. it could be bank. . It reflects the cash generation of the company. The company can also use external debt collector to collect the debt on behalf of the company. Character: When the company is taking debt the debt giver will look for the company’s historical data to analyze the trend or attitude of the company to pay back the loan.

operating costs like. But. The factor will take over the company’s administration. Invoice discounter will lend up to 70% or so of the value of one or more specific inventories. In the case of invoice discounting the discounter will not take control of the administration of company. the confidentiality of the company will not be hampered. which will create a bad impression on business partners of the company. factoring hampers the goodwill of the company. The client will get the money from the invoice discounter and the discounter will collect the original amount from the company’s receivables. A company can reduce bad debts by choosing factoring because the factor is providing insurance to the company. Factor will send invoices using his own name. It will hamper the relationship between the company and the customers. Therefore. which will hamper company’s confidentiality. In the case of invoice discounting the company will not get any insurance against the bad debts. salary. Invoice discounting Invoice discounting means selling of invoice to third party at lower rate to finance the immediate cash shortage. .

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