NES RATNAM COLLEGE OF ARTS, SCIENCE AND

COMMERCE
INTERNAL EXAM – SEMESTER IV
SUBJECT: ADVANCED FINANCIAL MANAGEMENT
NAME: FLEMIN GEORGE
ROLL NO.: 24
1. Explain various sources of Finance in detail?

Ans. There are three types of sources of fund i.e. Long term sources of finance, Medium
term of finance and short term sources of finance.

A. Long term sources of finance:

Long-term financing means capital requirements for a period of more than 5 years to
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, Preference Capital, Debenture or bonds, etc.

B. 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: Medium term loans from financial institution, Government Bonds,
Lease Finance and Hire Purchase Finance.

C. 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: Short term loan from commercial banks, Advances from
customers, Bill Discounting and Payables.
 2. Explain classification of Capital budgeting techniques?

Ans. Some of the major techniques used in capital budgeting are as follows: Payback
period, Accounting Rate of Return method, Net present value method, Internal Rate of Return
Method, Profitability index.

A. Payback period:
The payback (or payout) period is one of the most popular and widely recognized
traditional methods of evaluating investment proposals, it is defined as the number of
years required to recover the original cash outlay invested in a project, if the project
generates constant annual cash inflows, the payback period can be computed dividing
cash outlay by the annual cash inflow.

Payback period = Cash outlay (investment) / Annual cash inflow = C / A

B. Accounting Rate of Return method:

The Accounting rate of return (ARR) method uses accounting information, as
revealed by financial statements, to measure the profit abilities of the investment
proposals. The accounting rate of return is found out by dividing the average income
after taxes by the average investment.

ARR= Average income/Average Investment

C. Net present value method:

The net present value (NPV) method is a process of calculating the present value of
cash flows (inflows and outflows) of an investment proposal, using the cost of capital
as the appropriate discounting rate, and finding out the net profit value, by subtracting
the present value of cash outflows from the present value of cash inflows.

D. Internal Rate of Return Method:

The internal rate of return (IRR) equates the present value cash inflows with the
present value of cash outflows of an investment. It is called internal rate because it
depends solely on the outlay and proceeds associated with the project and not any rate
determined outside the investment.

E. Profitability index:
 It is the ratio of the present value of future cash benefits, at the required rate of return
to the initial cash outflow of the investment. It may be gross or net, net being simply
gross minus one.

3. Explain various types of working Capital in detail?

Ans. Working capital are of various types. They are explained as follows:

A. Permanent Working Capital

It is otherwise called as Fixed Working Capital. Permanent working capital implies
the base investment amount in all types of current resources which is respected at all
times to carry on business activities. The value of current assets have been increased
or decreased over a period of time. Even though, there is a need of having minimum
level of current assets at all times in order to carry on the business activities
effectively.

B. Temporary Working Capital

It is otherwise called as Fluctuating or Variable Working Capital. There is a close
relationship prevailing between temporary working capital and the level of production
and sales. There is no uniform production and sales throughout the year. If heavy
order is received for production and there is a large amount of credit sales, there is a
need of more amount of temporary working capital. At the same time, if production is
carried on in anticipation of demand in near future, temporary working capital is
required. In nutshell, temporary working capital is an extra working capital required
to support the changing production and sales activities.

C. Negative Working Capital

Sometimes, the value of current assets is less than the current liabilities, it shows
negative working capital. If such type of situation arise, the firm is going to meet the
financial crisis very shortly.

D. Reserve Working Capital

It is otherwise called as Cushion Working Capital. It refers to the short term financial
arrangement made by the business units to meet uncertain changes or to meet
uncertainties. A firm is always working with the expectation of some risks which may
be controllable or uncontrollable. The reserve working capital can be used in order to
meet the uncontrollable risks and sustain in the business world.

E. Regular Working Capital

 The minimum amount of working capital to be maintained in normal condition is
called Regular Working Capital.

F. Seasonal Working Capital

Some products have seasonal demand. Seasonal demand arises due to festival. In this
way, seasonal working capital means an amount of working capital maintained to
meet the seasonal demand of the product.

G. Special Working Capital

Special programmes may be conducted for business development. The programmes
may be advertisement campaign, sales promotion activities, product development
activities, marketing research activities, launching of new products, expansion of
markets and the like. Therefore, special working capital means an amount of working
capital maintained to meet the expenses of special programmes of the company.

4. Explain inventory Management in detail?

Ans. Inventory management is a systematic approach to sourcing, storing, and selling
inventory—both raw materials (components) and finished goods (products).
In business terms, inventory management means the right stock, at the right levels, in the
right place, at the right time, and at the right cost as well as price.
Inventory types can be grouped into four categories: Raw materials, Works-in-process,
maintenance, repair, and operations (MRO) goods and finished goods.

A. Raw materials:
They are any items used to manufacture components or finished products. These can
be items produced directly by your business or purchased from a supplier. For
example, a candle-making business could purchase raw materials such as wax, wicks,
and decorative ribbons.

B. Works-in-process:
It refers to unfinished items moving through production but not yet ready for sale. In
the case of a candle-making business, work-in-progress inventory might be candles
that are drying and unpackaged.

C. Maintenance, repair, and operations (MRO) goods:

They are items used to support and facilitate the production of finished goods. These
items are usually consumed as a result of the production process but aren’t a direct
 part of the finished product. For instance, disposable molds used to manufacture
candles would be considered MRO inventory.

D. Finished goods:
This goods are products that have completed the production process and are ready to
be sold: the candles themselves.

5. Explain Receivable Management in detail?

Ans. There are very few businesses, which have the luxury of receiving money before
selling, i.e. Selling for advance payments. Most of the Companies sell their offerings on a
credit. It means that they will collect the money after selling.
Although it looks very simple on the face of it, Managing receivables from Debtors can
be a very complex task depending on the nature of our business. As our business grows
and as our offering gets complex the process of collecting the payments needs to be
designed accordingly.
So the entire process of defining the Credit Policy, Setting Payment Terms, Payment
Follow ups and finally timely collection of the due payments can be defined as
Receivables Management.
In order to keep business running, we need cash. The whole purpose or objective of
Receivables Management is to keep inflow of cash healthy. The objectives are as follows:

A. Collect receivables from our sundry debtors.

B. Maintain a healthy cash flow for the company, so that it can pay our creditors.
C. Have proper Policy for Credit management.
D. A working process and mechanism for managing payment follow ups and timely
collection.
The Benefits of Accounts Receivable Management are as follows:
A. Better Cash Flow:
All our Budgets and projections depends on how much we can spend. Predictable cash
flow enables us to manage our operations and expansion plans.
B. Lower Working Capital Requirements:
Effective receivables management ensures that our Working Capital requirements are
kept at minimum.
C. Lowered Interest costs:
Working capital is also fixed capital, which attracts interest. Lower Debtors will reduce
our Interest burden.
D. Better Bargaining with Sellers:
When we are buying any goods or services, we can bargain mainly on quantity or
Payment terms. Having a good receivable management provides us with enough cash
flow to bargain effectively with our Suppliers.
E. Stop profit leakages:
In case of thin margins, just imagine how much more sales we have to do to recover and
adjust just one small bad-debt. Non receipt or delayed receipt is the biggest profit leakage
any company can have.