INTRODUCTION

FINANCIAL MANAGEMENT
Financial management seeks to plan for the future such that a personal or business entity has a positive flow of cash. The term financial management has a number of meanings including the administration and maintenance of financial assets. The process of financial management may also include identifying and trying to work around the various risks to which a particular project may be exposed. Some experts refer to financial management as the science of money management the primary usage of the term being in the world of financing business activities. However, the process of financial management is important at all levels of human existence, because every entity needs to look after its finances. From an organizational standpoint, the process of financial management is the process associated with financial planning and financial control. Financial planning seeks to quantify various financial resources available and plan the size and timing of expenditures. In the business world, this means closely monitoring cash flow. The inflow is the amount of money coming into a particular company, while outflow is the record of the expenditure being made by the company in various sources.

At the corporate level, the main aim of the process of business organization is to achieve the various goals a company sets at a given point of time. Businesses also seek to generate substantial amounts of profits with the help of a particular set of financial processes. Financial planning aims to boost the levels of resources at their disposal, while also functioning on money invested in them from external investors. Another goal companies have is to provide investors with sufficient amounts of returns on their investments. At the individual level, financial management mostly involves tailoring expenses as per the financial resources the particular individual has. Individuals who are in a favorable financial position, with surplus cash on hand or access to funding, plan to either invest their money for a positive return (which normally means that they have made more money after calculating the double impact of tax and inflation) or to spend it on discretionary items. Financial decision-making is also an important part of the modern day financial management process. The particular entities involved in financial management also need to be able to take the financial decisions that are intended to benefit them in the long run and achieve their financial aims, which is the basic premise of financial management.

WORKING CAPITAL MANAGEMENT

Working Capital
Working capital, also known as net working capital, is a financial metric which represents operating liquidity available to a business. Along with fixed assets such as plant and equipment, working capital is considered a part of operating capital. It is calculated as current assets minus current liabilities. If current assets are less than current liabilities, an entity has a working capital deficiency, also called a working capital deficit. A company can be endowed with assets and profitability but short of liquidity if its assets cannot readily be converted into cash. Positive working capital is required to ensure that a firm is able to continue its operations and that it has sufficient funds to satisfy both maturing short-term debt and upcoming operational expenses. The management of working capital involves managing inventories, accounts receivable and payable and cash. A measure of both a company's efficiency and its short-term financial health. The working capital ratio is calculated as:

Positive working capital means that the company is able to pay off its short-term liabilities. Negative working capital means that a company currently is unable to meet its short-term liabilities with its current assets (cash, accounts receivable and inventory). Also known as "net working capital", or the "working capital ratio". If a company's current assets do not exceed its current liabilities, then it may run into trouble paying back creditors in the short term. The worst-case scenario is
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bankruptcy. A declining working capital ratio over a longer time period could also be a red flag that warrants further analysis. For example, it could be that the company's sales volumes are decreasing and, as a result, its accounts receivables number continues to get smaller and smaller.

Working capital also gives investors an idea of the company's underlying operational efficiency. Money that is tied up in inventory or money that customers still owe to the company cannot be used to pay off any of the company's obligations. So, if a company is not operating in the most efficient manner (slow collection), it will show up as an increase in the working capital. This can be seen by comparing the working capital from one period to another; slow collection may signal an underlying problem in the company's operations.

Working Capital Management

A managerial accounting strategy focusing on maintaining efficient levels of both components of working capital, current assets and current liabilities, in respect to each other. Working capital management ensures a company has sufficient cash flow in order to meet its short-term debt obligations and operating expenses. Implementing an effective working capital management system is an excellent way for many companies to improve their earnings. The two main aspects of working capital management are ratio analysis and management of individual components of working capital.

A few key performance ratios of a working capital management system are the

working capital ratio, inventory turnover and the collection ratio. Ratio analysis will lead management to identify areas of focus such as inventory

ABC ANALYSIS
ABC analysis is a business term used to define an inventory categorization technique often used in materials management. ABC analysis provides a mechanism for identifying items which will have a significant impact on overall inventory cost whilst also providing a mechanism for identifying different categories of stock that will require different management and controls When carrying out an ABC analysis, inventory items are valued (item cost multiplied by quantity issued/consumed in period) with the results then ranked. The results are then grouped typically into three bands. These bands are called ABC codes. ABC codes 1. "A class" inventory will typically contain items that account for 80% of total value, or 20% of total items. 2. "B class" inventory will have around 15% of total value, or 30% of total items. 3. "C class" inventory will account for the remaining 5%, or 50% of total items. ABC Analysis is similar to Pareto in that the "A class" group will typically account for a large proportion of the overall value but a small percentage of the overall volume of inventory.

Benefit:
Inventory reduction has been a constant goal for all companies over the years. The shorter the time from customer order to cash in the bank the better. The fewer dollars tied up in inventory, the more money available for capital investment and expansion. Once a company accepts inventory as waste and not a necessary evil of business, inventory investment will be reduced to levels once thought impossible. Using the "ABC" concept to analyze and control inventory investment and turns is the simplest and most efficient method. Most inventories are made up of hundreds and possibly thousands of individual items necessary to manufacture a companys products. By rank ordering the inventory items in dollar terms, A items being the most expensive to C items being the least expensive, managing inventory investment can be broken down to a manageable level. "A" items usually make up 50 to 60% of inventory dollars; however, they only account for normally 10 to 20% of inventoried items. "B" items usually make up 30 to 40% of inventory dollars and only account for normally 30 to 40% of inventoried items. "C" items usually make up 5 to 10% of inventory dollars and account for normally 40 to 50% of inventoried items. By managing the "A" items, a positive impact can be made in inventory investment reduction. Reducing one or two "A" items can and will have a bigger impact on inventory reduction and increased inventory turns, greater than a possible reduction in all "C" items. Also, "ABC" classifications can be used to design cycle counting schemes. Count "A" items more often than "B" items and "C" items possibly not at all. The "ABC" concept allows a manager to devote resources where it will have the biggest positive impact. Management by Exception!
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INVENTORY MANAGEMENT
Inventory is a list for goods and materials, or those goods and materials themselves, held available in stock by a business. It is also used for a list of the contents of a household and for a list for testamentary purposes of the possessions of someone who has died. In accounting inventory is considered an asset. Inventory management, or inventory control, is an attempt to balance inventory needs and requirements with the need to minimize costs resulting from obtaining and holding inventory. The formal management of the timing and quantities of goods to be ordered and stocked by an organization in order that demand can always be satisfied without excess expenditure. Effective Inventory Management enables an minimizing costs. Inventory management must tie together the following objectives ,to ensure that there is continuity between functions : Companys Strategic Goals Sales Forecasting Sales & Operations Planning Production & Materials Requirement Planning. Inventory Management must be designed to meet the dictates of market place and support the companys Strategic Plan . The many changes in the market demand , new opportunities due to worldwide marketing , global sourcing of materials and new manufacturing technology means many companies need to change their Inventory Management approach and change the process for Inventory Control .
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organization to meet or exceed

customers' expectations of product availability while maximizing net profits or

Inventory Management system provides information to efficiently manage the flow of materials , effectively utilize people and equipment , coordinate internal activities and communicate with customers . Inventory Management does not make decisions or manage operations, they provide the information to managers who make more accurate and timely decisions to manage their operations. INVENTORY is defined as the blocked Working Capital of an organization in the form of materials . As this is the blocked Working Capital of organization, ideally it should be zero. But we are maintaining Inventory . This Inventory is maintained to take care of fluctuations in demand and lead time. In some cases it is maintained to take care of increasing price tendency of commodities or rebate in bulk buying. Traditional Supply Chain solutions such as Materials Requirement Planning , Inventory Control , typically focuses on implementing more rapid and efficient systems to reduce the cost of communicating information between and across the Inventory links in the SCM.COM focuses in optimizing the total investment of materials cost and workload for every Inventory item throughout the chain from procurement of raw materials to finished goods Inventory . Optimization means providing a balance of supply to meet the demand at a minimum total cost , Inventory level and workload to meet customers service goal for each items in the link of Inventory Chain . It is strategic in the sense that top management sets goals . These include deployment strategies ( Push versus Pull ) , control policies , the determination of the optimal levels of order quantities and reorder points and setting safety stock levels . These levels are critical , since they are primary determinants of customer
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service levels. Keeping in view all concerns , the latest concept of Vendor Managed Inventory is used to optimize the Inventory . We are entering into Vendor Managed Inventory , Annual Rate Contracts with manufacturers or their authorized dealers , who maintain Inventory on our behalf and supply the items as and when required . VMI reduces stock-outs and optimize inventory in supply chain . Some features of VMI include : Shortening of Supply Chain Centralized Forecasting Frequent communication of inventory, stock-outs and planned promotions Trucks are filled in a prioritized order , e.g. items that are expected to stock out have top priority then items that are furthest below targeted stock levels then advance shipments of promotional items Despite the many changes that companies go through, the basic principles of Inventory Management and Inventory Control remain the same. Some of the new approaches and techniques are wrapped in new terminology, but the underlying principles for accomplishing good Inventory Management and Inventory activities have not changed. The Inventory Management system and the Inventory Control Process provides information to efficiently manage the flow of materials, effectively utilize people and equipment, coordinate internal activities, and communicate with customers. Inventory Management and the activities of Inventory Control do not make decisions or manage operations; they provide the information to Managers who
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make more accurate and timely decisions to manage their operations. The basic building blocks for the Inventory Management system and Inventory Control activities are: * Sales Forecasting or Demand Management * Sales and Operations Planning * Production Planning * Material Requirements Planning * Inventory Reduction The emphases on each area will vary depending on the company and how it operates, and what requirements are placed on it due to market demands. Each of the areas above will need to be addressed in some form or another to have a successful program of Inventory Management and Inventory Control. Inventory is usually a distributors largest asset. But many distributors arent satisfied with the contribution inventory makes towards the overall success of their business: The wrong quantities of the wrong items are often found on warehouse shelves. Even though there maybe a lot of surplus inventory and dead stock in their warehouse(s), backorders and customer lost sales are common. The material a distributor has committed to stock isnt available when customers request it. Computer inventory records are not accurate. Inventory balance information in the distributors expensive computer system does not accurately reflect what is available for sale in the warehouse.
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 The return on investment is not satisfactory. The companys profits, considering its substantial investment in inventory, is far less than what could be earned if the money were invested elsewhere.

Benefits:
Help reduce purchasing and inventory costs. Connect inventory control, purchasing, and sales order processing with demand planning and help reduce costs, improve cash flow, and help ensure that you have the right stock available when you need it. Gain visibility into inventory processes. Effectively balance availability with demand and track items and their possible expiration dates throughout the supply chain to help minimize on-hand inventory, optimize replenishment, and increase warehouse efficiency. Improve customer satisfaction. Make more accurate order promises and intelligent last-minute exceptions with access to up-to-date inventory information. Respond quickly and knowledgably to customer queries for improved customer service. Reduce time to market. With integrated order, inventory, and distribution processes, as well as item tracking capabilities, your business can reduce manual data entry and get your goods to market fast.

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CASE STUDI ES
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CASE STUDY : INVENTORY CONTROL

Coverdrive Ltd Case Study Working Capital Management Inventory Control

Since joining Coverdrive, John Thistle the management accountant, has been implementing various systems linked to short-term planning and reporting. He has recently focused on a review of the stock holding of raw materials, consumables and maintenance spares and having conducted a full physical stock take and valuation at quarter ended 31 March he is concerned at the lack of control that exists in ordering issue and control of some stock items. At a recent management meeting John had agreed with Steve Ambrose, the MD, that one of his short-term objectives as management accountant would be a full review of working capital requirements and its control. He reports his concerns expressed regarding the control of stocks and Steve asks him to prepare a presentation on the issues of inventory control for the next management meeting, to which he plans to invite both the production and stores managers. Preliminary notes prepared by John in advance of the meeting

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In manufacturing and distributive trades, inventories (or stocks) constitute a substantial portion of total assets employed. goods. Accounting control is effected by the use of a series of control accounts for each category listed above and stores ledger accounts relating to quantities and values of stock on hand. Physical control comprises strategy for buying, handling, storing, issuing, supervising the stores function and taking stock. Inherent in any system of inventory control is the concept of stock levels, which are normally expressed in physical units but may also be in money terms. The objective of establishing control levels is to ensure that excessive stocks are not carried and working capital is not sacrificed, thereby avoiding the likelihood of being out of stock of any material. What are the factors to be considered when establishing control levels? Inventory control comprises accounting and the physical control of materials, work-in-progress and finished

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These include: i ii iii Working capital available and the cost of capital. Average consumption or production requirements. The re-order period the period between placing the order and receiving delivery. iv v vi vii viii Storage space available. Market conditions. Economic order quantity. Possibility of loss through deterioration or obsolescence. Costs of ordering, receiving, inspecting and accounting.

The stock levels used in inventory control systems for both accounting and physical measures are minimum stock, maximum stock, re-order level and the reorder quantity or economic order quantity; and I suggest that we implement such controls across our range of stock. Minimum stock level: The lowest level to which stocks should normally be allowed to fall, and is held as a buffer stock to be made available in situations of
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non-delivery by a supplier. It takes into account the re-order level and average consumption in the average delivery period. Maximum stock level: The highest level to which stock should normally be allowed to rise, otherwise too much working capital is tied up, thus sacrificing liquidity, and there is a risk of loss through deterioration and obsolescence. It takes account of the re-order level, the re-order quantity and the minimum consumption in the minimum delivery period. Re-order level: This is the level at which an order would normally be raised. It takes into account the maximum usage in the maximum delivery period. Re-order quantity or economic order quantity: This is the quantity which is most economical to order as it minimises the costs of ordering and the carrying costs such as storage, insurance and interest on capital. Once the re-order quantity has been determined, the other control levels can be determined by the following formulae: Minimum stock level = Re-order level (average usage in average delivery period).

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Maximum stock level = Re-order level + re-order quantity (minimum usage in minimum delivery period). Re-order level = maximum usage x maximum delivery period. Example: The following relates to stock item COV 5, calculate: re-order level maximum stock level minimum stock level Usage per month: Estimated period: minimum 2 months Re-order quantity: 3000 units 1200 units maximum 900 units minimum delivery maximum 4 months

Re-order level = 4 x 1200 = 4800 units Maximum level = 4800 + 3000 - (900 x 2) = 6000 units Minimum level = 4400 - (1050 x 3) = 1250 units
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The tabulation below shows a typical cycle of events for this stock item. This is a monthly summary and assumes that stock was received on the last day of month 2 and 5. Re-order levels would have been reached at the start of month 1, prior to the end of month 3 and towards the latter part of month 6. This summary is based on monthly receipts and issues. However the status of stock would be reported daily. Stock Item COV 5 (Units) Re-order and usage profile: Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Opening balance Issues Issues Receipt of order Issues Issues Issues Receipt of order Issues Quantity 1200 1100 3000 1200 1200 1100 3000 1100 Balance 5000 3800 2700 5700 4500 3300 2200 5200 4100

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When graphed this profile shows:

6000 5000 4000 UNITS 3000 2000 MINIMUM LEVEL 1000

MAXIMUM LEVEL RE-ORDER LEVEL

1 6

2 MONTHS

The graph shows the movement of stock and the levels kept within the predetermined levels of control. In the model illustrated so far, the re-order quantity is given. quantity. However,

consideration must now be given to the determination of the economic order

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When an order is placed with a supplier, certain start-up costs such as administration are incurred. If this was the only factor for consideration, we would make the order as large as possible, thus benefiting from maximum discounts. But, as previously mentioned, we must consider the holding costs. The economic order quantity is that quantity which minimises the total of the starting and carrying costs. There are two methods of determining this. One is the tabular method, the other by mathematical model.

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(i) Where

Mathematical formula Q A P S Q = = = = = Economic order quantity Annual demand in units Cost of placing an order Cost of holding one unit in stock for one year 2AP S

Assume that in case of a further stock item COV 6, 6000 units are required annually and that expenses relating to start up costs are 25 per order and carrying costs are 0.20 per unit per annum. Orders could be arranged in lots of 600, 1200, 2000, 3000 or 6000. Then:

2 x 6000 x 25 0.20

1225 units or 5 orders per annum

Tabular Method (1) Order size (2) Frequency of orders (3) Average stock (1/2 batch size) 600 10 300 1200 5 600 2000 3 1000 3000 2 1500 6000 1 3000
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(4) Starting costs (no. of orders x 25) (5) Carrying costs (average stock x 0.20) Total Cost

250 60

125 120

75 200

50 300

25 600

310

245

275

350

625

From this tabulation it appears that the EOQ is 1200 units as this minimises the total costs.

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Presented Graphically
600 500 400 300 200 100 0 Cost Total cost Economic order quantity 1200 Carrying cost

3 Order size

6 000s units

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Conclusion They intend to apply these controls and this model to a sample of stock items over the next few months to determine the possible savings in terms of investment in working capital.

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CASE STUDY : ABC ANALYSIS

The financial services organization is one of the top 10 largest vehicle financing organization in North America. They provide financing for leasing and loans, for both new and used vehicles, to over 600,000 customers a year, with an active portfolio of over 1.5 million customers or over $20 billion. It has provided this financing through more than 2,000 dealers throughout America. The company employs over 1,500 employees in 33 branches across the United States. The automobile finance industry in the United States is very competitive. Commercial banks, savings and loan associations, credit unions, finance companies and other captive automobile finance companies provide retail financing and leasing for new and used vehicles. Commercial banks and captive automobile finance companies also provide wholesale competitive financing programs for all dealers. This company's strategy is to supplement, with competitive financing programs, the overall commitment of the parent organization to offer a complete package of services to dealers and their customers. Business Issues The very competitive market in which the company operates in, as well as an expectation from the corporate head office that the company not only support the sales organization, but also contribute to the overall profitability of the organization, has made them focus even more on the efficiency and profitability of
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their operations. There is an expectation that the company remain a profitable entity. This has led them to examine the profitability of all their lines of business, as well as the profitability of their dealer channels through which their products are sold. By understanding which products and dealers contribute to profitability, the company can modify the ways they service their customers and sell their products so as to maximize profitability, while maintaining the necessary customer service and customer retention levels. By understanding why some dealers are more profitable than others, the levels of services to different dealers can be optimized to increase overall profitability. At present, business is transacted through 33 branches located throughout the United States. These branches perform many of the same activities, yet the cost structure and efficiency of all the branches vary greatly. By analyzing the activities that occur within the branches, the total cost, unit cost, cycle time and full time equivalent employees involved in each activity, the ABC results will allow the best practice team to analyze the business, in a way that makes sense. Understand that this diversity allows the best practice team to redefine which activities should occur where, and allows them to compare branches based on comparable data. The introduction of a centralized service center (call center) to handle most of the routine customer calls is one example of their attempt to optimize the efficiency of the operations. In this competitive environment, it is not enough to simply do things better and cheaper sometimes methods of work need to be drastically changed to meet and
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beat the competition. As all work is accomplished through processes, it is only through process improvement that action and outcomes are dramatically altered. The ABC analysis combined with process definition and analysis allows the company to address process improvement in a rational way, and with a full understanding of the cost and composition of each major process. Approach Focused Management Inc. was hired to assist the company in developing and implementing an Activity Based Costing decision-making system throughout the organization. The ABC analysis was to include all 2000 dealers and all the related products they sell, as well as all branches and the head office where activities were performed. Dealer and product profitability, branch efficiency, process costing and best practice analysis were the major expected outcomes of the project. The system was also set up to be repeatable and updateable on a periodic basis. With the advice, training and facilitation assistance of Focused Management (FMI), a cross functional team of 8 company associates set out to design and build an ABC tool which accurately reflected the organizations activities, costs and processes. The team used a combination of interviews and surveys to collect associate time by activity for all 1500 employees. Following activity analysis, the team created a cost-flow diagram, representing all activities performed in the organization, and for whom it is performed, and began collecting operational and financial data. Data was collected for all support activities, as well as all the unique activity to cost object drivers in a little over 3 months. In total, over 200,000 unique pieces of
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data were collected from operational data systems, Essbase data cubes and manual surveys. Following data collection, the team validated the preliminary activity, process and dealer costs, as well as dealer and branch profitability. The results were all uploaded to an Essbase data cube, which gave the team the ability to slice and dice the data across multiple dimensions, and analyze the data, looking for key insights. Upon completion of the validation, the team set out to analyze the final results, decide on next steps and present their findings to senior management. Results The ABC analysis showed tremendous differences in the profitability of dealers. On a dealer level, product by dealer level and a geographical level activity costs and profitability significant variations were found. The profitability of some dealers within the same geographical region varied greatly. Viewed by region, the results were equally as stunning across all branches. The view of dealer and product profitability by each individual dealer was a perspective that had never before been seen at the company in such detail. It was found those activities such as calling the collections list and insurance follow up did have an ultimate impact on the profitability of each dealer. By optimizing the activities and the processes through which these activities occur, it was felt that significant improvements in profitability could be realized within a short time period. It was felt that energy should be concentrated on those most profitable dealers.
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Process costs and through them, activity costs, differed greatly between all the branches. While you would expect activity costs and activity driver volumes to differ throughout the 33 branches, it was the differences in unit activity costs and activity costs per FTE, which were really significant. Since branches vary in size, as well as in the number of customers they service, the absolute cost of performing the activities within each branch vary with the volume of customers and the size of the branch territory. If all branches followed the same process and procedures, there should be little difference in the number of FTEs (associates) performing each activity at a comparable volume level. This, unfortunately, was not the case. The number of equivalent associates required to perform the same volume of activity varied greatly amongst branches. These differences have focused the attentions of the best practices group, who are currently redesigning how work is accomplished in the branches, as well as setting expectations to branch managers regarding the efficiency and effectiveness of what they do. The large cost of manual processes and steps involved in initiating and terminating leases and loans was of particular interest to the team. It is felt that through appropriate use of technology, these costs can be dramatically reduced. At present, Internet-based processing is being investigated, and an integrated call center in already in place and operating. Other proprietary technology enhancements are also being implemented currently. Next Steps Now that the original results have been accepted, and the results have been updated to reflect the current years data, the ABC champions are moving forward on several fronts. The first involves working closely with the best practices team. This involves standardizing activity and process definitions across the branches, and
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feeding cost and driver quantity information to the best practices team. The best practices team will then use the information in their ongoing process of redesign and measurement work. The ability to measure and monitor the progress of these improvements as they work towards their objectives will help ensure that resources are being directed in the most appropriate fashion. The ABC data provides excellent information for many projects currently underway at the company. The Balanced Scorecard and EVA initiatives are two examples where the information contained in the ABC analysis can be used to improve the use and validity of the initiatives. The ABC data is also being fed into the profitability analysis data cube currently being implemented. One anticipated step is the integration of the ABC data with the budgeting process. By basing many of the budgeting discussions and formulations on ABC principles, it is hoped the budgeting process can be streamlined and made more visible. All of these initiatives should help the company serve and retain their customer base, while continuing to meet their financial targets.

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Summary By implementing an Activity Based Costing analysis tool, the company has been able to quantify the specific reasons for differences in dealer profitability. The ABC analysis has brought to light the importance of process management, where best practice analysis measures performance across all branches. The ability to benchmark branch activities in a consistent and accurate way has allowed them to begin to redesign processes, and improve the overall efficiency of their operations. "Our initial ABC results were quite compelling, but in order for ABC to have a direct impact on the company and how we run our business, we must take ABC to a next level. I'm excited to say that we are close to approaching that level. By joining efforts with our Best Practices team, we finally have the platform for ABC to move beyond just getting results, but rather, we can now put the results into action. With the help of FMI to implement VBM, we have an opportunity to transform the company into a process-managed organization and completely change the way we make business decisions. It is definitely an exciting time for us." The journey to integrating Activity Based Costing data into the management and decision-making process at the company has not been an easy or automatic route. A great deal of time has been spent training and educating associates on what ABC is, what the results mean, and how to use the information. The results to date have shown the value that Activity Based Costing can add to the decision making process. As decision makers become more comfortable with the results of the ABC analysis, the value of the data will continue to expand. The company has not yet fully ingrained the ABC work into their organization, but they are well on their way.
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BIBLIOGRAPHY
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