ACCA Financial Management

• finished goods holding period = finished goods inventory / COS *  365
• WIP production period = WIP / COS * 365
• Raw materials holding period = raw materials inventory / raw materials purchases * 365

Double (2x) the floor space requird for each unit

(the warehouse must be large enough for max. capacity)

finance cost is added to holding cost

1. calculate EOQ
2. calculate Annual Cost with EOQ
   1. Annual cost = Holding Cost + Ordering cost + purchase cost
      1. Holding costs = x/2 * Ch
      2. Ordering Costs = D/x * Co (demand divided by EOQ = amount of orders)
      3. Purchase price for all necessary quanitites = Pp*D
3. calculate Annual Cost with Disount quanity
4. choose amount w. lowest cost

Order Quantity which minimizes the total costs relevant to ordering & holding inventory

Level to which inventory should fall befor placing a new order

Time between placing and receiving an order

1. Constant demand in lead time
   1. ROL = lead time * demand per day (this is the amount of inventory which is needed in the time between placing and receiving an order, to fullfill demand)
2. Uncertain demand in lead time
   1. Expected lead time demand = sum (level of demand * probability of level of demand)
   2. each level of demand >expected lead time: calculate the expected stock-out cost
   3. calculate expected annual buffer holding cost
   4. choose ROL with lowest stock-out & holding cost

Efficient management of liquidity and risk in a bsiness, including the management of funds, currencies and cash flows

suggests regular transfer from ST Investments into a current accont (convert ST investments into a current account)

Based on EOQ

D = annual requirement for cash

Co = transaction cost of selling ST investments (brokerage, commission)

Ch = opportunity cost of holding cash (IR difference between short-term investment and cash)

The assumption of constant demand for cash in the Baumol model is unrealistic. A cash management model which can accommodate a variable demand for cash may be more relevant. This is the strength of the Miller-Orr model.

The Miller-Orr model allows for uncertainty in cash receipts and payments. 

Cash balance is assumed to vary between a lower limit set by mgmt and an upper limit calculated by the model

A document drawn by the exporther and sent to the customer who signs to accept responsibility to pay the amount secified on the stated date

• Documents of title to the goods are only released to the customer when they have accebted the bill of exchange
• the exporter can:
  • hold the bill to maturity
  • discount the bill with a bank to receive cash earlier
    • EXPORTER ALWAYS CARRIES RISK

A bank discounting a series of bill of exchanges without recourse to the exporter if the customer does not pay

a payment guarantee backed by one or more banks with T&Cs

Documents of title to the goods are released at the same time (not later)

selling of selected sales invoices to a third party for a discounted cash sum, while retaining full control over the receivables ledger 

(with recourse, business keeps risk)

When a business enters into an invoice discounting arrangement, a finance company will provide a cash advance as a percentage of the outstanding sales invoices – usually in the region of 80%. As customers pay their invoices or new sales invoices are issued, the amount advanced will fall or rise to maintain the level of finance at 80% of the receivables.

• The finance company will charge a monthly fee for the service and interest on the advanced amount.
• The lender will require a floating charge over the trade receivable balances and may refuse to lend against invoices for customers with a high credit risk. Therefore, discounting is most suitable for companies selling to customers with high credit ratings and a good payment record.
• The process operates "with recourse" (i.e. the business keeps the risk of bad debts and must repay amounts advanced if a customer defaults).
• Responsibility for issuing sales invoices and credit control stays with the business. Still, the finance company will often require regular reports on the receivables ledger and the credit control process.

businesses offering a range of services in the area of sales administration and collection of amunts due from customers

As in invoice discounting, the business immediately receives cash representing a proportion of the total invoice value. However, unlike invoice discounting, the business does not retain responsibility for credit control. Debt factoring is an ongoing arrangement, while discounting tends to be a one-off arrangement to cover temporary cash shortages.

compare cost of discount to cost of financing account receivable (overdraft)

primary internal source: Retained Earnings

BUT if substantial RE but not enough cash, the company will not be able to finance an investment. Therefore retained cash is the source of finance

Retained cash has no issue costs & flexible in terms of amount used/repayment patterns

Other internal finance can be generated by increasing working capital efficiency

..

Companies should follow an established pecking order to raise finance simply & efficiently

1.  minimize cost
   1. cheapest: internal finance - Retained earnings
   2. bonds/bank loans
   3. equity issue
2. minimize time & expenses involved in persuading external investors
   1. if RE available, no need for external investors
   2. debt requires less time & cost than equity issue
3. asymmetrical information
   1. Mgmt knows more about the company than investors, and therefore their actions are interpreted by the market as insider info
      1. Equity issue interpreted as bad because mgmt with favourable inside info would like to avoid issuing shares because they would be undervalued
         1. A share issue impacts a company's value by diluting existing ownership, potentially lowering earnings per share (EPS), and changing the debt-to-equity ratio.
4. available sources
   1. new start ups dont have any RE and cannot borrow, so they are typically equity financed
   2. for growing companies, debt is preferred over equity (cheaper quicker easier)
   3. well-established companies can finance expansion with Retained Earnings. they will become heavily equity financed since RE is component of equity

Operating CF - Interest - Taxes: Interest & Taxes are committed cost, therefore focus is on maximising Operating CF

Operating CF = Operating Profit before depreciation & amortisation + Working Capital

Inventory +/- = Cash -/+

Receivables +/- = cash -/+

Payables +/- = cash +/-

A direct sale to the general public (most expensive method of raising equity)

An indirect sale to the public by selling shares directly to an issuing house (investment bank) which sells them to the public

the sponsor (investment bank) places the shares with its clients (pension funds etc) rather than offering shares to the general public (least expensive method of issuing new shares)

an offer to existing shareholders to buy new shares in proportion to their existing holdings

auction: public is invited to bid for share (useful if setting shareprice is difficult)

ordinary shareholder take more risk than any other investor

• ordinary dividends are discretionary -> company has no legal obligation to pay, shareholders could become nothing
• ordinary shareholder rank last in the event of bancrupcy/liquidation

Shareholders therefore require high returns to compensate for this risk

the expected share price after the rights issue.

(Pre-existing value of equity + proceeds of rights issue + project NPV) / nr of shares after right issue

• proceeds of rights issues are NET of issue cost
• if project was already anounced and market has semi-strong level of efficiency, the NPV is already included in the existing share price and does not need to be added

An issue of new shares or debentures to existing members, generally in the same proportions as their existing holdings. No payment is required from members as the bonus shares or debentures are paid up using the company's profits or reserves.

• investing
• financing
• dividend poliy

Dividend + = retained cash- = need for external financing +

Asset expenditure + = need for finance + = dividend -

• Venture Capital
  • a form of investment in startups and young companies with high growth potential, providing them with funding, expertise, and connections in exchange for a minority equity stake in the company.
• Private Equity Funds
  • Private Equity (PE) invests in established, mature companies to improve their operations and profitability, often taking majority stakes or full ownership, while Venture Capital (VC) focuses on early-stage startups with high growth potential, investing smaller amounts for minority stakes and accepting higher risks
• Business Angels
  • wealthy private individuals, often former entrepreneurs or executives, who invest their own capital into promising, newly-founded companies with high growth potential, usually in exchange for a minority stake (equity) in the business.
• Government Assistance
• Crowdfunding

• negotiable security evidencing a debt governed by a contract which specifies coupon rate, repayment schedule etc
• = loan note
• fixed harge over specified asset that cannot be sold unless debt is repayed
• floating charge over class of assets. on default, floating turns fixed and the asset class can no longer be traded until debt is repayed
• redeemable & unredeemable
• IR = fixed coupon in % of NV

• loan notes issued at substantial discount to NV and redeemable at NV on maturity
• low coupon rate but large capital gain on redemption
• cash flow advantage to borrower

b = proportion of profit retained

re = return on retained profits = profit/shareholder funds (ROE) = profit / net assets

1. Net Book Value
   1. Equity = Assets - Liabilities
2. Net Realisable Value
   1. NRV = estimated selling price - estimated cost necessary to make sale
   2. Equity = NRV Assets - liabilities
      1. min cost for buyers
3. Net Replacement Cost
   1. Equity = Estimated depreciated repl cost of NET ASSETS
      1. max price for buyer

For companies with little tangible assets, none of these methods makes sense!