1. Factors Affecting working Capital needs A firm should have neither low nor high working capital.

Low working capital involves more risk and more returns, high working capital involves less risk and less returns. Risk here refers to technical insolvency while returns refer to increased profits/earnings. The amount of working capital is determined by a wide variety of factors. 1. Nature of business 2. Seasonality of operations 3. Production cycle 4. Production policy 5.Credit Policy 6.Market conditions 7. Conditions of supply Nature of Business: The working capital requirement of a firm depends on the nature of the business. For example, a firm involved in sale of services rather than manufacturing or a firm is allowing only cash sales. In the first instance, no investment is required in either raw materials or WIP or finished goods, while in the second instance there exists no receivables as there is immediate realization of cash. Hence the requirement of working capital will be lower. Seasonality of Operations: If the product of the firm has a seasonal demand like refrigerators, the firms need high working capital in the periods of summer, as the demand for the refrigerators is more and the firm needs low working capital in the periods of winter, as the demand for the product is low. Production Cycle: The term production cycle refers to the time involved in the manufacture of goods. It covers the time span between the procurement of the raw materials and the completion of the manufacturing process leading to the production of goods. As funds are necessarily tied up during the production cycle, the production cycle has a bearing on the quantum of working capital. The longer

the time span of production cycle, the larger will be the funds tied up and therefore the larger the working capital needed and vice versa. Production Policy: The quantum of working capital is also determined by production policy. In case of the firms having seasonal demand of the products like refrigerators, air coolers etc., The production policy of the firm determines the amount of working capital requirement. If the firm has production policy to carry production at a steady level to meet the peak demand, this will result in a large accumulation of finished goods (inventories) during the off-seasons and the abrupt sale during the peak season. The progressive accumulation of finished goods will naturally require an increasing amount of working capital. If the firm has production policy to produce only when there is a demand then the firm needs low working capital during the slack season and high working capital during season. Credit Policy: The level of the working capital is also determined by the credit policy, as the firms credit policy determines the amount of receivables. If the firm has a liberal credit policy, then the firm needs high working capital and the firm needs low working capital if the companys credit policy does not allow it to extend credit to the buyers. Market Conditions: The working capital requirements are also determined by the market conditions. In case of the high degree of competition prevailing in the market the firm has to maintain larger inventories as customers are not inclined to wait for the product. This needs higher working capital requirements. If there is good demand for the product and the competition is weak, a firm can manage with smaller inventory of finished goods, as customers can wait for the product if it is not available in the market. Thus, a firm can manage with low inventory and will need low working capital requirements.

Conditions of Supply: The availability of raw materials and spares also determine the level of working capital. If there is ready availability of raw materials and spares, a firm can maintain minimum inventory and need less working capital. If the supply of raw materials is unpredictable, then the firm has to acquire stocks as and when they are available for ensuring continuous production. Thus, the firm needs to maintain larger inventory average and needs larger requirement of working capital. 2. Explain Objectives of cash management and motives of cash holding. Ans.: Objectives of cash managementPlan, manage, monitor, and control cash flows in order to create an acceptable balance between holding too little and too much cash. The ideal cash management system which allows the small business to operate for extended periods with cash balances near or at a level of zero is possible only under two conditions: (1) a perfect forecast of future net cash flows (cash inflows minus cash outflows) and (2) perfect matching of cash receipts and disbursements. Unfortunately, these two conditions are not commonly seen. Note: Perfect cash forecasting is not possible; inflows and outflows do not occur at the same time in the same amounts. Some inflows and outflows are uncertain, others are irregular, and still others are continual. Some objectives of cash management are: To reduce the need to borrow and if needed, to borrow at lower interest costs. To minimize idle cash balances. To maximize the return on surplus funds. To reduce bank charges and keep transaction costs as low as possible. Motives for Holding Cash In spite of the fact that cash does not earn substantial returns for the business but still a firm holds cash with the following motives:

1)

Transaction Motive:

Transaction motive refers to holding of cash to meet routine cash requirement to finance the transaction which a firm carries on in its ordinary course of business. For E.g. Cash payments to be made for purchase of materials, payments of wages, operating expenses, etc. 2) Precautionary Motive:

A Firm has to hold cash for purposes which cannot be anticipated or predicted. E.g., floods, strikes, for settlement of prior to the due dates, increase in cost of raw material collection of accounts receivables, etc 3) Speculative Motive:

In order to take advantage of opportunities which present themselves at unexpected moments and which are outside the scope of normal course of business. E.g., making purchases at favorable prices, an opportunity purchase raw material at reduced prices on payment of immediate cash, to speculate on interest rate movement, etc. 4) Compensating Motive:

Banks provide a variety of services to business firms, such as clearance of cheques, supply of credit information, transfer of funds etc. In case of some of these services banks charge a commission or a fee while for others they seek indirect compensation. Business firms a required to maintain a minimum balance of cash at the bank in order to compensate themselves for the services rendered to the business firms. Such balances are called compensating balances. 3. What are the source of finance.? Ans. Often the hardest part of starting a business is raising the money to get going. The entrepreneur might have a great idea and clear idea of how to turn it into a successful business. However, if sufficient finance cant be raised, it is unlikely that the business will get off the ground. Raising finance for start-up requires careful planning. The entrepreneur needs to decide:

How much finance is required? When and how long the finance is needed for? What security (if any) can be provided? Whether the entrepreneur is prepared to give up some control (ownership) of the start-up in return for investment?

The finance needs of a start-up should take account of these key areas:

Set-up costs (the costs that are incurred before the business starts to trade) Starting investment in capacity (the fixed assets that the business needs before it can begin to trade) Working capital (the stocks needed by the business e.g. r raw materials + allowance for amounts that will be owed by customers once sales begin) Growth and development (e.g. extra investment in capacity)

One way of categorising the sources of finance for a start-up is to divide them into sources which are from within the business (internal) and from outside providers (external). 1. Internal sources The main internal sources of finance for a start-up are as follows: Personal sources These are the most important sources of finance for a start-up, and we deal with them in more detail in a later section. Retained profits This is the cash that is generated by the business when it trades profitably another important source of finance for any business, large or small. Note that retained profits can generate cash the moment trading has begun. For example, a start-up sells the first batch of stock for 5,000 cash which it had bought for 2,000. That means that retained profits are 3,000 which can be used to finance further expansion or to pay for other trading costs and expenses. Share capital invested by the founder The founding entrepreneur (/s) may decide to invest in the share capital of a company, founded for the purpose of forming the start-up.

This is a common method of financing a start-up. The founder provides all the share capital of the company, retaining 100% control over the business. The advantages of investing in share capital are covered in the section on business structure. The key point to note here is that the entrepreneur may be using a variety of personal sources to invest in the shares. Once the investment has been made, it is the company that owns the money provided. The shareholder obtains a return on this investment throughdividends (payments out of profits) and/or the value of the business when it is eventually sold. A start-up company can also raise finance by selling shares to external investors this is covered further below. 2. External sources Loan capital This can take several forms, but the most common are a bank loan or bank overdraft. A bank loan provides a longer-term kind of finance for a start-up, with the bank stating the fixed period over which the loan is provided (e.g. 5 years), the rate of interest and the timing and amount of repayments. The bank will usually require that the start-up provide some security for the loan, although this security normally comes in the form of personal guarantees provided by the entrepreneur. Bank loans are good for financing investment in fixed assets and are generally at a lower rate of interest that a bank overdraft. However, they dont provide much flexibility. A bank overdraft is a more short-term kind of finance which is also widely used by start-ups and small businesses. An overdraft is really a loan facility the bank lets the business owe it money when the bank balance goes below zero, in return for charging a high rate of interest. As a result, an overdraft is a flexible source of finance, in the sense that it is only used when needed. Bank overdrafts are excellent for helping a business handle seasonal fluctuations in cash flow or when the business runs into short-term cash flow problems (e.g. a major customer fails to pay on time). Two further loan-related sources of finance are worth knowing about:

 Share capital outside investors For a start-up, the main source of outside (external) investor in the share capital of a company is friends and family of the entrepreneur. Opinions differ on whether friends and family should be encouraged to invest in a start-up company. They may be prepared to invest substantial amounts for a longer period of time; they may not want to get too involved in the day-to-day operation of the business. Both of these are positives for the entrepreneur. However, there are pitfalls. Almost inevitably, tensions develop with family and friends as fellow shareholders. Business angels are the other main kind of external investor in a startup company. Business angels are professional investors who typically invest 10k - 750k. They prefer to invest in businesses with high growth prospects. Angels tend to have made their money by setting up and selling their own business in other words they have proven entrepreneurial expertise. In addition to their money, Angels often make their own skills, experience and contacts available to the company. Getting the backing of an Angel can be a significant advantage to a start-up, although the entrepreneur needs to accept a loss of control over the business. You will also see Venture Capital mentioned as a source of finance for start-ups. You need to be careful here. Venture capital is a specific kind of share investment that is made by funds managed by professional investors. Venture capitalists rarely invest in genuine start-ups or small businesses (their minimum investment is usually over 1m, often much more). They prefer to invest in businesses which have established themselves. Another term you may here is private equity this is just another term for venture capital. A start-up is much more likely to receive investment from a business angel than a venture capitalist. 3. Personal sources As mentioned earlier, most start-ups make use of the personal financial arrangements of the founder. This can be personal savings or other cash balances that have been accumulated. It can be personal debt facilities which

are made available to the business. It can also simply be the found working for nothing! The following notes explain these in a little more detail. Savings and other nest-eggs An entrepreneur will often invest personal cash balances into a startup. This is a cheap form of finance and it is readily available. Often the decision to start a business is prompted by a change in the personal circumstances of the entrepreneur e.g. redundancy or an inheritance. Investing personal savings maximises the control the entrepreneur keeps over the business. It is also a strong signal of commitment to outside investors or providers of finance. Re-mortgaging is the most popular way of raising loan-related capital for a start-up. The way this works is simple. The entrepreneur takes out a second or larger mortgage on a private property and then invests some or all of this money into the business. The use of mortgaging like this provides access to relatively low-cost finance, although the risk is that, if the business fails, then the property will be lost too. . Borrowing from friends and family This is also common. Friends and family who are supportive of the business idea provide money either directly to the entrepreneur or into the business. This can be quicker and cheaper to arrange (certainly compared with a standard bank loan) and the interest and repayment terms may be more flexible than a bank loan. However, borrowing in this way can add to the stress faced by an entrepreneur, particularly if the business gets into difficulties. Credit cards This is a surprisingly popular way of financing a start-up. In fact, the use of credit cards is the most common source of finance amongst small businesses. It works like this. Each month, the entrepreneur pays for various business-related expenses on a credit card. 15 days later the credit card statement is sent in the post and the balance is paid by the business within the credit-free period. The effect is that the business gets access to a free credit period of aroudn30-45 days! Many people think that both cash and fund are same, however they both are different and so is the case with cash flow statement and funds flow statement. Let?s look at some of the differences between 5

cashflow and funds flow statement? 1. While funds flow statement reveals the change in the working capital of a company between two balance sheet dates while cash flow statement reveals the change in the cash position of the company between two balance sheet dates. 2. As funds flow statement shows the change in working capital it deals with all the components of working capital while cash flow statement deals only with cash and cash equivalents. 3. In case of funds flow statement schedule of changes in working capital is prepared while in case of cashflow statement no such schedule is prepared. 4. While cash flow statement there is classification of cash flows as cash flow from operating activities, cash flow from investment activities and cash flow from financing activities, but as far as funds flowstatement is concerned there is no such classification. 5. As cash flow statement is only concerned with cash related transactions it is can be easily understood by a person who does not have accounting knowledge which is not the case with funds flow statement. A distinction between these two statements may be briefed as under:(i) Funds Flow Statement is concerned with all items constituting funds (Working Capital)for the business while Cash Flow Statement deals only with cash transactions. In other words, a transaction affecting working capital other than cash will affect Funds statement, and not the Cash Flow Statement. (ii) In Funds Flow Statement, net increase or decrease in working capital is recorded while in Cash Flow Statement, individual item involving cash is taken into account. (iii) Funds Flow statement is started with the opening cash balance and

closed with the closing cash balance records only cash transactions. (iv) Cash Flow Statement is started with the opening cash balance and closed with ht closing cash balance while there a no opening or closing balances in Funds Flow Statement.
Differences Between Cash Flow Statement And Funds Flow Statement Followings are the main differences between cash flow statement and funds flow statement.

1.Concept
Cash flow statement is based on narrow concept of funds, which considers changes in cash. Funds flow statement is based on the changes in working capital which considers both the changes in cash as well as other components of current assets and current liabilities.

2.BasisOfPreparation
Cash flow statement is prepared on cash basis. Funds flow statement is prepared on accrual basis.

3.Workingcapital
Cash flow statement does not require use of changes in working capital because all the changes in assets and liabilities are summarizes in cash flow statement. Funds flow statement requires to use of separate statement of changes in net working capital.

4.Link
The preparation of cash flow statement considers only those transactions that are linked with flow of cash. The preparation of funds flow statement considers those transactions that are linked with flow of funds along with actual cash.

5.Usefulness
Cash flow statement is more useful in short term analysis and cash planning. Funds flow statement is more useful in long-term analysis of financial planning.

6.a Simulation Analysis In simulation analysis, we create a mathematical model of a system or process, usually on a computer, and we explore the behavior of the model by changing key values (inputs) of the system and observing how the system responds each time. this is called running a simulation. A simulation consists of many -- often thousands of -- trials. Each trial is an experiment where we supply numerical values for input variables, evaluate the model to compute numerical values for outcomes of interest, and collect these values for later analysis.

Charts and Graphs Statistical Measures Sensitivity Analysis Parameterized Simulation Next: Simulation Optimization

6.b Objectives of financial management fix the target of finance manager. Under the scope of financial management, he has to achieve different objective of financial management. We can make the list of these objectives: 1. To Reduce the Misuse of Funds It is the objective of financial management to reduce the misuse of funds. I can take my own example. I hate misusing of my hard earned money. Last month, I have bought DVD writer for starting business of CD and DVD of educational tutorials. But, after spending one month, DVD writer is being used for production or business purposes; I think this is misuse of my fund. If I deposited it in bank, I can earn interest on saving account on daily basis. Like me, company also misuses his funds in bad projects. We should learn from objective of financial management and reduce the misuse of even one rupee.

2. To Maximize the Profit in Long Run If a businessman invests his money and wants to earn high profit, it means, it is taking high risk according to risk theory of financial management. This is not objective of financial management, but to maximize the profit in long run is real aim of financial management. 3. To Maximize the Wealth of Company An investor only purchases shares, if he hopes that he will earn high profit on it, otherwise, he can deposit his money in saving account of bank. So, it is the objective of financial management to maximize the value of share. It can be possible by following way. a) To Increase Dividend per share b) To Increase Earning per share c) To Analyze the value of share in market 4. To Fulfill the Social Responsibility Company uses the natural resources and earns money and funds. Suppose Xyz Company started a plant in F place and use water, land and machines, it earned 10 million dollars from that plant. According to my view, Xyz Company takes his all natural resources from society in the form of land, water, metal and minerals. Companys reputation can be calculated with how many employees are working in it. What facilities are given by company to his employees? If company only shows his balance sheet of dead plants, machinery and other assets but there is not provision of any social activity or donation, that company will not get any goodwill. Some companies are being operated on the basis of public deposits instead of share capital. Why? And answer is security and that company can give only the security who wants to benefit of society like a social worker. 6.c Inventory Management Techniques Inventory management techniques are used by enterprises to strike an effective balance between inputs and outputs of a given process of production

or trade. The following article covers some effective steps and techniques that can be used by people to properly manage their inventories. What are inventory management techniques is a question that is quite commonly asked by businessmen. Inventory is often the largest priced asset of the business after the fixed assets. The inventory of a business is often defined to be a list of all items that are present in the stock of raw materials. Keeping the inventory also means keeping a tab on the realizable value, market value and the book value of all the stocks, stock in production and finished stock. Often inventory control methods are mistaken with inventory management methods, due to the almost synonymous meaning of the terms. The two terms are however different and inventory control methods are practical models that help the organization to curb over consumption of a particular item of the inventory. Inventory control also involves the measurement of time element that is required to consume a given volume of raw materials. The inventory management formulas are basically used for the following purposes:

Allotment of resources at the right time Minimization of re-order time and cost Maintaining a constant and equivalent inflow and outflow of raw materials

The end result is that the combination of inventory management models and inventory control techniques help in a smooth inflow of raw materials at a relatively cheap cost and at a perfect timing. Modern inventory management techniques are basically formulas and models that are established by firms on the basis of the need of the raw material and availability of the raw material. 6.d Factoring Mechanism Client invoices his customer in theusual way-only adding a notificationthat the invoice is assigned to andmust be paid to a FACTOR Client submits copies of invoices to aFACTOR, accompanied by thereceipted delivery challan or any othervalid proof of dispatch.

Factoring Mechanism A FACTOR will provide pre-payment up to80% of the invoice value Follows up with the customers forrealization of payments due Balance payment made immediately onrealization Sends monthly statement of account tokeep the client informed of the factoredinvoices

Simulation analysis is one of the important techniques that are utilized in risk analysis in capital budgeting. Simulation analysis is implemented for preparing a probability profile regarding a criterion of merit by stochastically aggregating the variable values that are associated with the opted criterion. With the help of sensitivity analysis, the sensitivity of Net Present Value or NPV and IRR or Internal Rate of Return and many other types of criterion of merit to changes in fundamental elements can be ascertained. It offers data like the following:

In case the quantity manufactured and sold is reduced by 1 percent, other factors remaining constant, the Net Present Value also diminishes by 6 percent. This type of data, although helpful, cannot be sufficient with regards to decision making. The decision-making authority also needs to have an idea about the probability of this type of events. This data may be rendered by simulation analysis. The process of simulation analysis can be categorized into the following steps:

Patterning the project. The project pattern demonstrates the relation between the Net Present Value with the various parameters and the external variable quantities. The parameters are regarded as variable inputs delineated by the decision-making authority and they remain unchanged in

every simulation run. The external variable quantities are variable inputs that have random characteristics and are beyond the influence of the decisionmaking authority. Assigning the probability distributions of external variable quantities and parameter values Choosing a value in a stochastic manner by picking a value out of the probability distributions for every external variable quantity Ascertaining the net present value or NPV matching the stochastically produced values of external variable quantities, as well as pre-assigned values of parameters Performing steps 3 and 4 on several occasions for receiving a huge count of net present values (simulated) Diagramming the net present value frequency distribution.