CAT FFM Course notes PDF

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FFM Course notes

Syllabus A: Working Capital Management ............................. 5 Syllabus A1abc. Working Capital Management. ............................................. 5 Syllabus A1de. Cash Operating Cycle. ......................................................... 8 Syllabus A1d. Receivables Days. ............................................................... 11 Syllabus A1d. Payable days. ..................................................................... 13 Syllabus A1d. Inventory days. .................................................................... 14 Syllabus A1f. Overtrading. ......................................................................... 15 Syllabus A1g. Over-capitalisation and Over-trading.. ..................................... 16 Syllabus A1g. Ratios and Strategy. ............................................................. 18 Syllabus A2b. Work In Progress - WIP. ....................................................... 21 Syllabus A2acd. Economic Order Quantity .................................................. 22 Syllabus A2d. EOQ with Discounts. ...........................................................25 Syllabus A2d. Buffer Stock. ....................................................................... 27 Syllabus A2e. Just-In-Time. ....................................................................... 28 Syllabus A3. Accounts payables. ............................................................... 30 Syllabus A3. Managing Receivables in Practice. ........................................... 34 Syllabus A3g & C3d. Early Settlement Discounts (Creditors). ......................... 36 Syllabus A3g. Early Settlement Discounts. ................................................... 38

Syllabus B: Cash Budgeting .................................................. 42 Syllabus B1a. Cash, cash flow and funds. .................................................. 42 Syllabus B1b. Importance of cash flow management. ................................... 43 Syllabus B1c. Sources of finance. .............................................................. 44 Syllabus B1de. CF and different types of organisations. ................................ 45 Syllabus B1fg. Cash vs. Accrual Accounting. .............................................. 47 Syllabus B1h. Cash flow and profit. ............................................................ 48 Syllabus B1h. The effect of transactions on cash flows. ................................ 50 Syllabus B2a. Cash budget.......................................................................54 Syllabus B2b. Linear Regression. ............................................................... 55 Syllabus B2b. Time Series Analysis. ........................................................... 59 1

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Syllabus B2c. Inflation and the impact on CF. .............................................. 63 Syllabus B2deg. Cashflow Forecasts. ........................................................66 Syllabus B2f. The Use of Simulation, Expected Values and Sensitivity. ............ 70

Syllabus C: Managing Cash Balances .................................. 73 Syllabus C1a. Main functions & treasury functions. ....................................... 73 Syllabus C1b. Advantages of a centralised treasury department. .................... 79 Syllabus C1c. ADV and Disadv. of centralised cash control. .......................... 80 Syllabus C1d. Cash Handling Procedures. .................................................. 82 Syllabus C1ef. Optimal cash balances. ....................................................... 83 Syllabus C2a. Types of banks. .................................................................. 85 Syllabus C2h. Financial Markets. ................................................................ 88 Syllabus C2bc. The Role of Financial Intermediaries. ..................................... 91 Syllabus C2d. Benefits of financial intermediation .......................................... 93 Syllabus C2e. Relationships between financial institutions .............................. 95 Syllabus C2h. The role of money and capital markets ................................... 97 Syllabus C2h. The role of banks in the operation of the money markets. ......... 99 Syllabus C2f. The characteristics and role of the principal money market ....... 101 Syllabus C2e. Equity: .............................................................................104 Syllabus C2e. Preference Shares............................................................. 106 Syllabus C2g. NCL - debts ..................................................................... 108 Syllabus C2i. Functions of Stock and Bond markets. .................................. 112 Syllabus C2j. Reasons for a stock exchange listing. ...................................113 Syllabus C3aef. Short term finance. .......................................................... 115 Syllabus C3b. Different forms of bank loans. .............................................. 118 Syllabus C3b. Loan or overdraft?. ............................................................ 120 Syllabus C3c. Legal relationship between bank and customer. .................... 122 Syllabus C4abcd. Cash surpluses and deficits. ......................................... 125 Syllabus C4e. Risk and Return of different securities. .................................. 127 Syllabus C4f. Default Risk. ...................................................................... 129

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Syllabus C4gh. Baumol Model ................................................................131

Syllabus D: Financing Decisions ......................................... 133 Syllabus D1. Economic Policy. ................................................................. 133 Syllabus D1. Monetary Policy. .................................................................. 139 Syllabus D2. Medium term finance. .......................................................... 141 Syllabus D3ab. Long term finance. ........................................................... 143 Syllabus D3b. Debt or Equity? ... ............................................................. 148 Syllabus D3c. Gearing considerations. ...................................................... 150 Syllabus D3d. Merits and limitations of LT finance. ...................................... 153 Syllabus D3e. Mix of finance in an organisation. ......................................... 155 Syllabus D3f. Internal funds. ....................................................................157 Syllabus D4a. SMEs and stakeholder interests.. ........................................ 158 Syllabus D4bc. Reasons why a small business can find it difficult to obtain. ... 159 Syllabus D4d. Government and SME ....................................................... 161 Syllabus D4ef. Venture capital. ................................................................. 163 Syllabus D4gh. Finance for SMEs. ........................................................... 164

Syllabus E: Investment Decisions ....................................... 167 Syllabus E1a. Simple and compound interest. ........................................... 167 Syllabus E1c. Concept of time value of money. ......................................... 170 Syllabus E1bde. Discounting. .................................................................. 171 Syllabus E2a. Importance of capital investment planning. ............................. 173 Syllabus E2b. Preparation of a capital expenditure budget ........................... 174 Syllabus E2c. Capital and revenue expenditure. ......................................... 175 Syllabus E2d. Investment in NCA vs. investment in WC .............................. 177 Syllabus E2e. Investment appraisal process. ............................................. 178 Syllabus E3a. Payback method. .............................................................. 180 Syllabus E3a. Adjusted Payback. ............................................................. 185 Syllabus E3b. Accounting Rate of Return. ................................................. 187 Syllabus E3cd. Relevant costs. ................................................................ 191 3

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Syllabus E3ef. NPV. ............................................................................... 195 Syllabus E3f. Annuities & Perpetuities. ....................................................... 197 Syllabus E3gh. Internal Rate of Return.......................................................199 Syllabus E3i. NPV v IRR. ......................................................................... 202 Syllabus E3j. Discounted Cashflows. ........................................................ 204

Syllabus F: Credit Management .......................................... 206 Syllabus F1a. Key elements of a contract. ................................................. 206 Syllabus F1b. Terms and conditions - contracts with credit customers. ......... 208 Syllabus F1c. Collection of debts. ............................................................ 209 Syllabus F1d. Data protection. ................................................................. 211 Syllabus F1e. Bankruptcy and insolvency. ................................................. 213 Syllabus F2ab. Credit management. ......................................................... 215 Syllabus F2c. Assessing the credit-worthiness. .......................................... 218 Syllabus F2de. Internal and external sources of information. ......................... 219 Syllabus F2f. Credit Score. ...................................................................... 220 Syllabus F2g. Rejecting or extending credit. ............................................... 221 Syllabus F2hi. Ratios and credit-worthiness. .............................................. 222 Syllabus F2j. Ratio limitations....................................................................224 Syllabus F3a. Accounts receivables records. ............................................. 226 Syllabus F3b. Internal sources ................................................................. 228 Syllabus F3b. Accounts Receivable Reconciliation ...................................... 231 Syllabus F3c. External sources. ............................................................... 232 Syllabus F4abc. Debt collection. .............................................................. 235 Syllabus F4c. Follow-up processes. ......................................................... 238 Syllabus F4d. Debt recovery methods ...................................................... 239 Syllabus F4e. Debt collection and court .................................................... 242 Syllabus F4e. Writing off debts ................................................................. 245 Syllabus F4fg. Factoring and invoice discounting. ....................................... 247 Syllabus F4h. Debt Factor. ...................................................................... 248

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Syllabus A: Working Capital Management Syllabus A1. A1. Working capital management cycle. Syllabus A1a. Define working capital. b) Explain why working capital management is important.

c) Explain the relationship between cash flows and the working capital cycle.

Working Capital Management What is it and why is it important?

Working capital is simply the money needed for day to day business. This money is needed to keep the company alive so its importance cannot be over emphasised. It is the management of each current asset and each current liability that is essential to the business. •

Working capital = net current assets = current assets - current liabilities Current assets

Current liabilities

Cash

Overdraft

Inventories

Payables...