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FINANCIAL MANAGEMENT

(5535)

ASSIGNMENT NO 2

Master In Business Administration

LASIAF AA355353

Digit 7
m aiaidaa eaia m n ai eai ai aic aianaga i d ig ai gom aiimig amn

Allama Iqbal Open University Islamabad.

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ACKNOWLEDGEMENT

Apart from the efforts of me, the success of this project largely depends on the encouragement and guidelines of many others.

I would like to show my greatest appreciation to my teacher. I can't say thank you enough for his tremendous support and help.

I fell motivated and encouraged every time I attend his class. Without his encouragement and guidance this project would not have materialized.

The guidance and support received from all the classmates who contributed and are contributing to this project, was vital for the success of the project.

I am grateful for their constant support and help.

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An Abstract:
The problem of competition is increasing in global market place. It has forced the firms to consider ways of improving the inventory control system. Severe competition makes it necessary to continuously introduce new products and new designs of products.

Now a day every company will face the competition, because of that every company maintains a flexible inventory system. It will depend on how the company will respond to the fast changing market needs, customer expectation and technological advancement. The company will focus on improvements on the following measures. The Inventory Level and work-in-progress Quality of the Product and technological advancement Flexibility and responsiveness of the production process

To meet the increased demand of the product, it is necessary to increase the capacity of existing construction facility.

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TABLE OF CONTENTS PARTICULARS

Introduction

PAGE
5

Role of Financial Manage

EOQ

Practical study

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Mission & Objectives

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INVENTORY CONTROL IN FFC

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SWOT ANALYSIS OF HBL

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CONCLUSION

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References

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TRSS INTRODUCTION:

Inventory: Inventories are assets (a) Held for sale in the ordinary course of business (b) In the process of production for sale (c) In the form of materials or supplies to be consumed in the production process

Inventory management: It is a Systems and process that identify inventory requirements, set targets, provide replacement techniques and report actual and projected inventory status. Inventory management is the process of efficiently overseeing the constant flow of units into and out of an existing inventory. This process usually involves controlling the transfer in of units in order to prevent the inventory from becoming too high, or dwindling to levels that could put the operation of the company into jeopardy. Competent inventory management also seeks to control the costs associated with the inventory, both from the perspective of the total value of the goods included and the tax burden generated by the cumulative value of the inventory. Balancing the various tasks of inventory management means paying attention to three key aspects of any inventory. The first aspect has to do with time. In terms of materials acquired for inclusion in the total inventory, this means understanding how long it takes for a supplier to process an order and execute a delivery. Inventory management also demands that a solid understanding of how long it will take for those materials to transfer out of the inventory be established. Knowing these two important lead times makes it possible to know when to place an order and how many units must be ordered to keep production running smoothly. Calculating what is known as buffer stock is also key to effective inventory management. Essentially, buffer stock is additional units above and beyond the minimum number required to maintain production levels. For example, the manager may determine that it would be a good idea to keep one or two extra units of a given machine part on hand, just in case an emergency situation 5

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arises or one of the units proves to be defective once installed. Creating this cushion or buffer helps to minimize the chance for production to be interrupted due to a lack of essential parts in the operation supply inventory. Inventory management is not limited to documenting the delivery of raw materials and the movement of those materials into operational process. The movement of those materials as they go through the various stages of the operation is also important. Typically known as a goods or work in progress inventory, tracking materials as they are used to create finished goods also helps to identify the need to adjust ordering amounts before the raw materials inventory gets dangerously low or is inflated to an unfavorable level. Finally, inventory management has to do with keeping accurate records of finished goods that are ready for shipment. This often means posting the production of newly completed goods to the inventory totals as well as subtracting the most recent shipments of finished goods to buyers. When the company has a return policy in place, there is usually a sub-category contained in the finished goods inventory to account for any returned goods that are reclassified as refurbished or second grade quality. Accurately maintaining figures on the finished goods inventory makes it possible to quickly convey information to sales personnel as to what is available and ready for shipment at any given time. In addition to maintaining control of the volume and movement of various inventories, inventory management also makes it possible to prepare accurate records that are used for accessing any taxes due on each inventory type. Without precise data regarding unit volumes within each phase of the overall operation, the company cannot accurately calculate the tax amounts. This could lead to underpaying the taxes due and possibly incurring stiff penalties in the event of an independent audit.

Financial Manager:
A finance manager organizes and manages an organization's or an individual's financial portfolio. They also prepare financial reports, oversee 6

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investments and help with cash management. According to the Bureau of Labor Statistics, nearly every government agency, business firm and other organizations--such as non-profit organizations--employ at least one financial manager and sometimes more than one. This makes a financial manager a critical member of many organizations.

Role of Financial Manage:

Financial activities of a firm is one of the most important and complex activities of a firm. Therefore in order to take care of these activities a financial manager performs all the requisite financial activities. A financial manger is a person who takes care of all the important financial functions of an organization. The person in charge should maintain a far sightedness in order to ensure that the funds are utilized in the most efficient manner. His actions directly affect the Profitability, growth and goodwill of the firm. Following are the main functions of a Financial Manager:

Raising of Funds
In order to meet the obligation of the business it is important to have enough cash and liquidity. A firm can raise funds by the way of equity and debt. It is the responsibility of a financial manager to decide the ratio between debt and equity. It is important to maintain a good balance between equity and debt.

Allocation of Funds
Once the funds are raised through different channels the next important function is to allocate the funds. The funds should be allocated in such a manner that they are optimally used. In order to allocate funds in the best possible manner the following point must be considered The size of the firm and its growth capability Status of assets whether they are long term or short tem Mode by which the funds are raised. These financial decisions directly and indirectly influence other managerial activities. Hence formation of a good asset mix and proper allocation of funds is one of the most important activity

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Profit Planning
Profit earning is one of the prime functions of any business organization. Profit earning is important for survival and sustenance of any organization. Profit planning refers to proper usage of the profit generated by the firm. Profit arises due to many factors such as pricing, industry competition, state of the economy, mechanism of demand and supply, cost and output. A healthy mix of variable and fixed factors of production can lead to an increase in the profitability of the firm. Fixed costs are incurred by the use of fixed factors of production such as land and machinery. In order to maintain a tandem it is important to continuously value the depreciation cost of fixed cost of production. An opportunity cost must be calculated in order to replace those factors of production which has gone thrown wear and tear. If this is not noted then these fixed cost can cause huge fluctuations in profit.

Understanding Capital Markets

Shares of a company are traded on stock exchange and there is a continuous sale and purchase of securities. Hence a clear understanding of capital market is an important function of a financial manager. When securities are traded on stock market there involves a huge amount of risk involved. Therefore a financial manger understands and calculates the risk involved in this trading of shares and debentures. Its on the discretion of a financial manager as to how distribute the profits. Many investors do not like the firm to distribute the profits amongst share holders as dividend instead invest in the business itself to enhance growth. The practices of a financial manager directly impact the operation in capital market. Financial manager basically provided finance or financial advice to other colleagues and clients to enable them to make sound business decisions In inventories management he issue and maintain finance according to the requirement of the firm

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Financial managers makes decision in inventory management on basis of pervious trend of EOQ and Stock Turnover Ratio etc

EOQ:
The economic order quantity (EOQ) is the amount of inventory to be ordered at one time for purposes of minimizing annual inventory cost

EOQ

2 AR cost per order I carrying cost

AR Annual Requirement I Interest No of orders:

The number of order may be calculated as below

Number.Of .Orders

Annual Requirement EOQ

Frequency of order: The frequency of order may be computed as under

Frequency.Of .Orders

Day in a Year No Of Orders

Inventory or Stock Turn over Ratio:

Stock turnover ratio tells the financial manager how many times in a year stock is used up and replaced. The greater the stock turnover, the more efficient is there stock policy.

Stock.Turnover.Ratio

Cost of materials consumedduring the period Average Stock of materials during the period
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Stock.Turnover.in.days

Days of the period Stock Turnover Rate

Stock.Turnover.Ratio

Cost of materials consumedduring the period Average Stock of materials during the period

Stock.Turnover.in.days

Days of the period Stock Turnover Rate

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Practical Study:

History of FAUJI FERTILIZER COMPANY LIMITED (FFC), PAKISTAN

With a vision to acquire self - sufficiency in fertilizer production in the country, FFC wa s i n c o r p o r a t e d i n 1 9 7 8 a s a p r i va t e l i m i t e d c o m p a n y. T h i s wa s a j o i n t v e n t u r e between Fauji Foundation (a leading charitable trust in Pakistan) and Haldor Topsoe A / S o f D e n m a r k . T h e i n i t i a l a u t h o r i ze d c a p i t a l o f t h e c o m p a n y wa s 8 1 3 . 9 M i l l i o n Rupees. The present share capital of the company s t a n d s a t R s . 3 . 0 B i l l i o n . A d d i t i o n a l l y, F F C h a s R s . 1 . 0 B i l l i o n s t a k e s i n t h e s u b s i d i a r y F a u j i F e r t i l i ze r B i n Qasim Limited (formerly FFC-Jordan Fertilizer Company Limited).T h e C o m p a n y w a s l i s t e d o n K a r a c h i a n d L a h o r e S t o c k E xc h a n g e s i n 1 9 9 1 a n d o n Islamabad Stock Exchange in 1992. Company employees were also allotted shares for motivation and promoting a sense of participation. Based on related criteria of Karachi Stock Exchange, primarily quantum of dividend payout, FFC has been placed in the list of top 25 companies of Pakistan consecutively for seven years since 1994, topping the list in 1997. FFC has many landmarks to its c r e d i t . S i n c e c o m m e n c e m e n t o f i t s c o m m e r c i a l production in mid June 1982 till December 2000, the Company has sold 22.89 million tons of fertilizers. This includes 17.79 million tons of Sona urea and 0.52 million tons Sona DAP in the domestic market and 0.39 million tons urea exports to China, Iran, Philippines, India, Bangladesh, Sri Lanka, Thailand and Tanzania. The remaining 4.19m i l l i o n t o n s i n c l u d e i m p o r t e d f e r t i l i z e r s i . e . u r e a , D A P , N P , e t c . P r e s e n t l y , i t i s marketing over 2 million tons of fertilizers annually and holds

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44% share of the urea market. It has saved the country around US $ 3 billion through import substitution and contributed almost Rs. 30 billion to the Government by way of taxes, levies, custom d u t i e s , e x c i s e d u t y/ s u r c h a r g e o n g a s p u r c h a s e s b e s i d e s p r o v i d i n g e m p l o ym e n t t o hundreds of individuals. FFC together with Fauji Foundation from Pakistan and Jordan Phos p h a t e M i n e s Company from Jordan sponsored the establishment of a urea/ DAP complex at Port Qasim, Karachi. FFC-Jordan Fertilizer Company Limited (FJFC) was incorporated in November 1993 as a public limited company. FFC's shareholding is 30% of the paid up capital of FJFC. Under an agreement FFC is marketing the entire production of FJFC under its own brand name Sona. FFC has progressed well from its inception till to-date. Three projects in a span of less than 20 years have been set up each incurring over US$ 300 million is a performance r e c o r d u n p a r a l l e l e d i n t h e c o u n t r y. B u i l d i n g o n i t s f o u n d a t i o n s t h e C o m p a n y i s confident to take on new challenges. FFC's vision for the 21st century is diversification and establishing projects beyond the territorial limits of the country in collaboration with world famous international industrial holdings. The manufactur ing facilities, located in Goth Machhi near Sadiqabad in Rahimyar Khan consist of two ammonia/ urea plants with a designed production capacity of 1.33million tons of urea based on natural gas from Mari Gas Fields. F F C believes in selling a programmer rather than just products. Company has adopted a customer oriented strategy by marketing qu a l i t y p r o d u c t s backed by efficient and effective support services with emphasis on developing the market through practical and innovative farmer education. Farmer Advisory Service with well qualified agronomists was established by the Company in 1981, a year before the commencement of commercial production. This free of cost and on the spot service t o t h e f a r m e r s i s p r o v i d e d i n t h e f o r m o f c r o p d e m o n s t r a t i o n s , f i e l d d a ys , f a r m e r meetings, group discussions, farm visits and distribution of technical literature in Urdu/Sindhi on important crops. The farmers are also provided highly subsidized soil/ water testing facilities through three laboratories equipped with the state of art equipment and computerized recommendation systems. The Company pursues an innovative education oriented advertising policy 12

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utilizing electronic/ print media and roadside advertising . Radio commercials are developed in regional languages. FFC has conducted four international seminars on core agricultural issues. Through these seminars which were attended by various local and foreign luminaries, special recommendations were developed to address the issues and enhance agri. production. Fauji Fertilizer Company Ltd. remains committed to continue to play its role in the development of agriculture in Pakistan by not only supplying high quality fertilizers but also technical services to the farmers in the years to come for improving agricultural productivity and increasing their income.

Vision: FFC's vision for the 21st Century remains focused on matching the Company with fresh challenges and included diversification on ventures within and beyond the territorial limits of the Country in collaboration with leading business partners.

Mission: FFC's mission is to sustain its role as the leader in i n d u s t r i a l a n d a g r i c u l t u r a l a d v a n c e m e n t o f Pakista n by setting and achieving new and higher g o a l s a n d t a k i n g i n i t i a t i v e s . T h e C o m p a n y i s committed to ensuring safe and conducive work environment, providing high quality products and a l l i e d s e r vi c e s t o i t s c u s t o m e r s a n d p r o f i t a b l e returns to its shareholders.

Objectives of the company

The broad objectives of the company are,

To sustain its role as market leader in urea production and marketing

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To deliver exclusive values and services to the shareholders and c u s t o m e r s through its strategies

To place great value on social responsibilities and welfare

To develop a culture based on principles of honesty, integrity, fairness and respect

To provide farmers technical services through technical services department free of cost

To hire and retain satisfied workforce

To play a vital role in agricultural development of the country

To provide the quality products

To set high standards for production and sale and achieve these objectives INVENTORY CONTROL IN FFC: A n i n v e n t o r y i s a s t o c k o r s t o r e o f g o o d s . F i r m s t yp i c a l l y s t o c k h u n d r e d s o r e v e n thousands of items in inventory, ranging from small things such as pencils, paper clips, screws, nuts and bolts to large items such as machines, trucks, construction equipment, etc. Fauji Fertilizer Company carries supplies of raw materials, purchased parts, spare parts, tools and other supplies. At the end of six months schedule of every material is prepared with stock code description. It includes the following items Description Unit of measurement Opening-Quantity Amount Receipt-Quantity, Amount Consumption-Quantity, amount Closing Balance- Quantity Amount The statements of bags, diesels, petrols and gases are prepared monthly 14

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Material Receiving Report (MRR): When the suppliers supplies the material at the warehouse the end user inspects the material for specifications and a report is pre p a r e d c a l l e d M a t e r i a l Inspection Report when the unit manager finds that the end user is satisfied with the material supplied he prepares Material Receiving Report. Then this report is sent to Mate rial Accou ntin g secti on of the Fina nce department along with other supp orting documents. 1 ) D a t e 2 ) Name of supplier 3) Order no. 4) Item code 5) Description 6) Unit price 7) Location on warehouse 8) Unit of measure Material Issue Voucher (MIV): The material is issued to plant and other department as per requirement. The department who needs any material from the warehouse issues a voucher called Material Issue Voucher. That voucher is duly signed by the department manager. That issued voucher contains three copies. The unit manager at warehouse signs it and sends one copy en user keeps one copy for warehouse and sends one to the Material section. The Material section records that how much material has been issued during one month. MIV contains the following information: Date of issuance 15

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Stock Movement report (SMR): At the end of each month the department prepares a Stock Movement Report which tells about the transaction of stock during the month. The report includes the following items Date Description Item Code Quantity Unit Price Debit Value Stock Status Report (SSR): This repor t tells the status of stock at the end of each month, quarter and at the end of e a c h ye a r . T h i s r e p o r t i s t h e n s e n t t o H e a d O f f i c e f o r f u r t h e r a n a l ys i s a n d c o n t r o l p u r p o s e s . T h i s r e p o r t i s t h e n s e n t t o H e a d O f f i c e f o r f u r t h e r a n a l ys i s a n d c o n t r o l purposes. This report is basically prepared by compiling the various closing inventory reports from the plan which states the opening balance, receipt, usage and closing inventory. It includes the following items Serial No Item Code Type Unit of Measurement Price Stock on Hand Warehouse location Stock Reserved 16

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TRSS Stock In order Order Number Value

The accountant prepares a journal voucher (JV) in which the stock consumed is expensed out and debited where as store account is credited.

Reconciliation of stock/store: The accounts are reconciled with the balance as per books and as p e r s t o c k s t a t u s report. The difference is due to the computer variance as the computer calculates up to4 decimal places. The balance in the Stock Status Report is more accurate than the balance in the books. If the balance in books is less then SSR then respective entries are passed and the account is reconciled. Physical Inspection of Inventory: The Material department inspects the inventory in the warehouse. The items in the books are matched with the items physically present in the warehouse. The items are i d e n t i f i e d b y t h e s t o c k c o d e s , w h i c h a r e m e n t i o n e d o n t h e r a c k s . I n c a s e o f a n y discrepancy, the unit manager of the warehouse is responsible. It may occur due to u navoidable condition. The loss of item is written off by debiting loss account and crediting stock account. The inspection report includes the following items Class Item Code Unit Of Measurement Physical Balance SSR Balance Variance The Inspection report is checked and signed by the Finance Manager.

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TRSS Foreign/ Imported Material:

Some times the material is purchased from abroad. Such material in c l u d e s t o o l s , machinery, equipment, chemicals, catalysts, vehicles, etc. In this case Letter of Credit (LC) is opened in the name of the vendor. FFC has bank accounts of Head Office at Rawalpindi whom pays on the behalf of the company. That transfers amount to the forei gn bank of the vendor . After payment the Head Office sends the debit note to the Finance department to record the expense. When the vendor recei ves the amount, he supplies the goods/ material through ship or by air. There is a clearing agent of FFC in Karachi who receives the consignment from t h e p o r t . H e c l e a r s t h e m a t e r i a l a n d p a ys c l e a r a n c e c h a r g e s , c u s t o m d u t y a n d o t h e r expenses. The f r e i g h t a n d cost is paid by the Head Office at Rawalpindi. The clearing agent a l s o arranges transport to transfer the material to Plant site at FFC Goth Machhi. When the material reaches the warehouse the end user inspects the m a t e r i a l f o r specifications and a report is prepared called Material Inspection Report (MIR). When the unit manager finds that the end user is satisfied with the material supplied he prepares Material Receiving Report (MRR). Then this report is send to the Material Accounting Section of the finance department along with other supporting documents. The accountant at this section records the entry in the inventory c o n t r o l s ys t e m prepared in Oracle. The Material section receives all the details of expenses which are debited to the purchase order and goods in transit account are credited.

SWOT Analysis:

Strengths FFC is the market leader in the fertilizer having 65% of the market share. FFC is using a single brand name SONA for its products like SONA urea, SONA DAP helping farmers to remember the name. Company being the market leader sets standards for the industry

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FFC devotes considerable time and efforts to promote awareness regarding good farmers techniques and methods among growers community The Company continues to enhance the facility of providing farmers free farm advisory services through farm advisory centres. Currently company is having 5 FACs all over the country. FFC peruses an innovative education oriented advertising policy utilizing electronic/ print media and road side advertisement FFC is only Fertilizer Company in the industry conducting seminars on core agricultural issues. Inviting local and foreign luminaries

Weakness Size of the company is very large which produces administrative problems. The promotion of the management employees is made after the period of three years. Sales force has to face a tough time when moved to far- flung areas equally in other provinces. Transfers are made after the period of three years, which cause the lack of performance of policies. The high differences between the salary packages of the executives and the employees. The ideas from the bottom are not welcomed; for the most part orders areas signed from higher authorities. Lengthy organizational hierarchy. Non- availability transport during peak season. Dumping of fertilizer by the dealers Opportunities:

Having a strong financial position company can start production of the new product line. Adding some new unit can enhance the production capacity of the plants. Company is in a position to set up a new plant in the country. FFC can partic ipate in the acquisition of their companies being privatized by the government. If FFC decides for the export of Urea it can earn much better revenues. 19

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Being an agriculture country and due to increasing awareness a b o u t t h e balanced use of fertilizer, demand for the fertilizer will increase. Company can start over sea investment like that one of PA K I S T A N MARCO PHOSPHORSE-SA. The increasing governmental support for meeting the demand pf fertilizer in the country. FFC can export Urea to Afghanistan and other neighboring countries. Availability of natural gas from Iran can helping setting up a new Urea plant in that vicinity and thus meeting the demand of Urea in the country at cheap rates

Threats: Fertilizer supply in remote areas. Dumping of under priced imported urea in local markets Inconsistent governmental policies Importing urea due to rising demand Changing fertilizer prices Lack of education in grower community New competitors in the industry Long of gas supplies No availability of railway wagons Unbalanced use of fertilizer Phenomenal increase in the prices of basic feedstocks Conclusion: Fertilizer industry occupies an important place in Pakistans economy. Pakistanis basically an agrarian economy. Fertilizer is one of the key inputs used in agricultural production and is thereby the backbone of agriculture. Agriculture contributes to 23%of the countrys GDP and accounts for approximately 42% of employment and is the largest source of foreign exchange earnings by serving as the base sector of the countrys major industries like textiles.

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TRSS Recommendations:

FFC need to go for diversification ant integration. Consumption of fertilizer is increasing 5 % per year so to meet the domestic need it is necessary to set up the new operation and plants in different areas.

References:

http://aaupwiki.princeton.edu/index.php/Inventory_Management

http://www.amcy5.com

http://www.barcodesinc.com

http://www.b2binternational.com

http://en.wikipedia.org

www.google.com

http://www.inventorymanagement.com

http://people.brunel.ac.uk

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