Assignment as part of Finance for Effective Marketing (FEM) in Postgraduate Diploma in Marketing program by Sri Lanka Institute of Marketing 2016 batch II

1. Finance for Effective Marketing (FEM)
Assignment Topic Managing Finance in Business
Student Name H.D.S.T. Perera
Reg. No 0000022260
December 2016 Examination
Postgraduate Diploma in Marketing
Sri Lanka Institute of Marketing

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Assignment checklist & declaration
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Assignment checklist & declaration form ( This sheet)
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Table of contents
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References
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Signature: ________________________________ Date: _________________

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Assignment Marking Scheme
Subject
Student Registration Number
Criteria
Marks
Allocated Awarded
Aligning to the purpose of the assignment 20
Some of the answeraddressestothe purpose of the question 1-5
Thishas addressedthe purpose of the assignment 6-10
Has addressedthe purpose of the assignmentcoherently 11-15
Thishas addressedthe purpose of assignmentcomprehensively 16-20
Clarity of expression 20
An attempttoorganize ina logical manner 1-5
Satisfactoryshowingof logical mannerandorganization 6-10
Showshigherlevelof Carefullyand logicallyorganized 11-15
Showscoherentstructure withclearlyexpressedideas 16-20
Using examples/evidences 20
Showsa little use of examples 1-5
Some use of examples.Some evaluationattempted 6-10
Some use of examples.Wellevaluated 11-15
Showsappropriate examplesare fullyandreliablyevaluated 16-20
Critical analysis of concepts, theories, conclusions 20
Demonstrateslimitedevidenceof critical analysis 1-5
Demonstratessome critical analysisof relevanttheory 6-10
Demonstratesapplicationof theorythroughcritical analysis 11-15
Demonstratesapplicationof critical analysiswellintegrated 16-20
Following assignment guidelines 20
Limitedfollow-upof assignmentguidelines 1-5
Some level of follow-upof assignmentguidelines 6-10
Good displayof adherence toassignmentguidelines 11-15
Excellentadherence toassignmentguidelines 16-20
Total
100
Special Remarks
Signature of the Examiner

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Assignment Topic: Managing finance in Business
Content
The role of the finance mangers are much more challenging in today’s business context.
Their work must ensure that the overall value of the business is enhanced whilst maximizing
the profit. In business, finance managers perform a range of vital tasks of managing debtors,
inventories, creditors and liquidity which are the key aspects that assist in maintaining good
business health. Further, they must look into the need for short term and long term financial
requirements of the business in order to support various activities/projects under taken.
Based on the organization of your choice, you are required to do an in-depth analysis t to
answer the tasks given below.
Task One
Present a brief background study about the organization including the nature of their
business.
Task Two
Do an in-depth analysis of Working Capital Management of the organization in relation to
“How the theories are in practice” and give recommendations for further improvements. In
carrying out this study identify the challenges faced in inventory management, debtor’s
management and creditor’s management and the strategies to overcome this situation.
Task Three
Identify the sources of long term capital used in the organization and discuss any
alternatives that they could have used to finance the business.

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To : Management of Tradeline Marketing Company (Pvt) Ltd
From : Financial Consultant
Subject : Managing Finance in Business
Date : 20.11.2016

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Table of Contents Page
Executive Summary…………………………………………………… 7
1. Background (Task 01) ……………………………………………... 8
2. Financial Statement Analysis ……………………………………… 8
3. Profitability Rations………………………………………………... 8
3.1. Gross Profit Margin……………………………………………. 9
3.2. Net Profit Margin………………………………………………. 9
3.3. Recommendations……………………………………………... 9
4. Working Capital Management of the Organization (Task 2)……. 11
4.1. Creditors Management………………………………………… 11
4.2. Inventory Management……………………………………… 11
4.2.1. Inventory Turnover………………………………………. 12
4.3. Debtors Management………………………………………….. 12
4.4. Working Capital Cycle………………………………………… 13
5. Sources of Long Term Financing of the Organization (Task 3)……. 15
5.1. Accumulated Profits…………………………………………… 15
5.2. Shareholders Money…………………………………………… 15
5.3. Borrowings……………………………………………………… 15
6. References………………………………………………………….. 17

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Executive Summary
Finance is a critical aspect of business. The proper management of finance in an organization
is the difference between long-term success of an enterprise or its failure. As Marketers, an
understanding of finance is necessary to make the right decisions in developing various
marketing strategies. The following three tasks demonstrate important aspects of finance to
marketing professionals.
Task 01, will introduce the company under study. The task will look at the financial
strength and profitability of the company by analyzing its financial ratios.
In task 02 we will investigate how well the company manages its working capital, its
policies regarding debtors, creditors and inventory.
And finally in task 03 we look at the company’s sources of long term capital. Whether the
company requires additional capital and what sources the company identifies as suitable
resources for funding.

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Task 01
1. Background
Established in September 2015, Tradeline Marketing Company (Pvt) Ltd is the latest
addition to Appollo Holding, Rajagiriya. Appollo Holdings which started operation in 2011
is a growing diversified enterprise with business in sectors such as FMCG, travel, exports,
distribution, interior products and leisure.
Appollo Holdings experienced a rapid growth in all its sectors within a very short period
of time. With its success in mostly consumer related products and services the company
wanted to expand its operations into the industrial products sector. And the result was
Tradeline Marketing Company (Pvt) Ltd.
Tradeline Marketing Company as the name implies is in the business of trading. The
company presently operates in two entirely unrelated sectors, poultry and industrial products.
The company is registered as a Limited Liability Company with three main shareholders.
The seed capital of the company is Rs. 32,000,000. The company is led by the managing
director who is supported by two directors who make up the shareholders. The operations of
the business are handled by a ten member staff.
2. FinancialStatement Analysis
The following segments will look at the financial standing of the company. Approximate
values were obtained from the company’s Finance Controller from the Profit and Loss
Statement and Balance sheet for 2015/2016.
The balance sheet and profit and loss statements are not attached due to company policy
and privacy issues.
3. Profitability Ratios
Profitability ratios give an understanding of the financial stability and future potential of a
business. As reiterated earlier the values are approximate and are given in millions.

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3.1. Gross Profit Margin
The gross profit margin of the company is presently at 20%. The company’s goal is
to establish a sustainable profit margin above 33% within the next two years.
3.2. Net Profit Margin
The net profit margin of the company, which is the percentage of profit remaining
after deducting all operational expenses, is around 7%. This is a cause of concern for
the company as you will see there is an adverse drop from gross margin of 20% to
net profit of 7%.
The reason for this slide in margin is the company’s high operating expenses. The
operation expenses of Tradeline include administrative, finance, sales & distribution
and direct expenses. The direct expenses that is included in the profit and loss
statement is for packing material and labor charges related to packing in the
company’s poultry business.
3.3. Recommendations
There are several areas for the company to look at in reducing the 13% gap
between its gross and net profits. The company needs to look at each expense
category under the operating expenses to see where it could make an improvement.
Some of the administrative expenses that could be reduced are as communications
expenses, fuel cost, transport and vehicle hiring charges.
Transport and vehicle hiring charges exceed over Rs. 3 Million per month which
is too high for a start-up company. The major reason for this high transport expense
is the company’s warehouse location. The company’s warehouse is located close to
25 km away from Colombo. And about 99% of the customers are located within
Colombo and its suburbs. This means transport vehicles cost from warehouse to
Colombo is a waste as there are virtually no high end customers within this radius.
Also another measure the company needs to look at is purchasing its own transport
vehicle. With a Rs. 3 Million monthly cost, the company can afford to lease its own
fleet of vehicles. Also if the company could accommodate maintenance and fuel

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expenses within this limit, it can benefit by not only reducing transport cost but also
benefit from an asset addition.
The company should also look at areas improve its revenue. As discussed earlier
the company aims at achieving a stable gross margin above 30%. To achieve this
objective the company needs to increase the gap between turnover and cost of goods
sold. Several options are available.
 The company can increase prices. But ideally this option should be one of the
last considered as the company is in its infancy and there is competition that
needs to be considered.
 Alternatively the company can expand its industrial product portfolio to
increase total sales.
 The company can also look for low cost suppliers to reduce cost of goods and
impact the gross profit.
 Importing higher quantities also can be considered to gain economies of scale
and reduce cost of goods sold. This is of course subject to the inventory
policy of the company, which is part of working capital management
discussed in task 2.

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Task 2
4. Working Capital Management Of The Organization
Working Capital Management involves Inventory, Debtors and Creditors. In the
following subsections we will look at the above three aspects in relation to the operations
of the company.
4.1. Creditors Management
Tradeline Marketing Company (Pvt) Ltd is an importer. Typical creditors such a
business include foreign suppliers.
The current company policy concerning debtors is to pay them in advance through
telegraphic transfer. The main reason for this policy is that the company is new and has
less bargaining power with the supplier. The fluctuating value of the US dollar is also
another concern for the company.
Poultry is imported in containers and sold in the same quantities. Animal Feed world
prices fluctuate on a daily basis. The sales manager monitors world supply prices through
a real time web application. The process resembles monitoring the stock exchange for
daily share prices. Ordering at the right time is critical. The right time of course is when
prices are at the lowest point within a certain period. Orders are placed immediately in
multiples of 20 feet containers. Thus the local market price fluctuation of one rupee could
have a major impact on the profit and loss of a sale.
There is no definite re-order level. The company could go for several weeks without
stocks before placing an order as seen above. The world prices determine the order
capacity and timing.
As order values are very large the company opts for import funding through short term
bank loans.
We will now look at how the company manages the second aspect of working capital –
inventory.
4.2. Inventory Management
The store manager is responsible for all operations relating to inventory. The inventory
is maintained through ERP (Enterprise Resource Planning) software at the head office.

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Manual records are also maintained in the store premises. A casual weekly comparison is
done between software records and manual records of stock each Monday before starting
the business week. A quarterly physical stock count is done and reports forwarded to
accounts division.
4.2.1. Inventory Turnover
The Inventory Turnover ratio measures how effectively the company manages
its inventory. Accordingly the following calculation can be done. (The values
are approximate and are given in millions)
Inventory Turnover = Closing Stock Balance x 365
Days Cost of Sales
= Rs. 5 Million x 365
Rs. 196 Million
= 10 Days
The company maintains an Inventory Turnover around 10 days. This is a
very good sign for the company as inventory holding period is less. It also
means that the company generates high sales. The monthly turnover of the
company is approximately Rs. 17 Million. Other advantages of high inventory
turnover include no degradation and potential obsolescence.
With a potential annual turnover of Rs. 200 Million, the company should be
able to comfortably meet its working capital requirements in theory. But
turnover does not necessarily mean cash in hand as products are sold on credit
basis. We will now look at how effectively the collection department
functions.
4.3. Debtors Management
Debtor’s days measures how long the company takes on average to collect its
receivables/payments from its customers. Accordingly the following calculation was
done.

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Debtors Days = Debtor Closing Balance x 365
Turnover
= Rs. 55 Million x 365
Rs. 200 Million
= 100 Days
The average collection period is around 100 days. Although inventory turnover is
high, the collection period is too long. This is not a good sign for the company as
funds are tied up in debtors, which requires company to depend on external sources
for capital requirements.
External sources such as bank and finance institutions charge an interest in return
for funds. For the company interest payments are an expense that will reduce the Net
Profit.
Finance institutions will also look at the inefficiency of payment collection in the
company. Finance institutions need to be assured that the company requesting funds
has the capacity to pay back efficiently. Also finance institutions will look at stock
value when giving funds to the company, as stocks could be considered a security for
funding.
In addition to finance institutions, the company can also look at Factoring as a
solution. A Factoring Company provides funds to an organization by overtaking its
debtors as a security. Sometimes the factoring company provides the debt collection
as well. The factoring company will charge a fee for its service which is referred to as
the discount rate.
4.4. Working Capital Cycle
Days Working Capital is an accounting and finance term used to describe how
many days it takes for a company to convert its working capital into revenue
(Investopedia.com, 2016). The working capital cycle ratio measures the efficiency of
managing working capital.
The working capital cycle of the company is 100 days. The longer the cycle is, the
longer a business is tying up capital in its working capital without earning a return on
it (Wikipedia, 2016).

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The two key figures to pay attention is debtor’s turnover days and creditor’s
turnover days. Ideally the company should reduce debtor turnover days. The
company should negotiate trade terms with customers to collect payments earlier. By
offering a discount for early settlements the company can achieve better results. But
this will of course have an effect on the profit margins of the company.
The company also has the option of negotiating credit terms with suppliers
(creditors). But due to unpredictable fluctuations in exchange rates, this is not as
feasible as the first option. For example a 30 day credit period would sometimes
mean that the company, at the time of making payment will have to pay a higher
value if US Dollar has appreciated.
While higher ratios shows inefficiency, it is important to compare against other
companies in the same industry as different industries have different working capital
standards (Investopedia.com, 2016)

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Task 3
5. Sources ofLong Term Financing of the Organization
Long term capital requirement is financing required by an organization for a period of
over one year. It is different from short term financing which is normally used to provide
money that has to be paid back within a year.
There are several methods of raising funds for long term capital requirements of an
organization. The sources of long-term funding of Tradeline Marketing Company are
summarized below.
5.1. Accumulated Profits
A company may not distribute its total profits among its shareholders. It may
retain a part of the profits and utilize it as capital. This is known as accumulated
profits.
The policy of Tradeline also is to utilize accumulated profits as the first source of
long term capital for the business.
5.2. Shareholders money
The second source of funding for long term capital is shareholders money. As
discussed in task 01 Tradeline Marketing Company has three shareholders. The
shareholders investment is represented in the company’s balance sheet under equity
as share capital.
5.3. Borrowings
Another source of funding is borrowings. Borrowings are long term loans the
company obtains from external sources such as banks and financial institutions.
Tradeline currently enjoys short term loan facilities from its banker to fund its
imports. As discussed in task 01 the company has sufficient sales to repay its short
term obligations. But it has to properly manage its collection policy with customers
to maintain good relations with its bankers.

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The company presently has no need to borrow from external financial institutions
for long term capital requirements. This policy is of course subject to flexibility, as
there might be instances in future where external borrowing will be required to fund
long term projects.

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6. References
1. Investopedia. 2016. Days Working Capital Definition [ONLINE] Available
at: http://www.investopedia.com/terms/d/days-working-capital.asp? [Accessed 16
November 2016]
2. Wikipedia. 2016. Working capital [ONLINE] Available
at: https://en.wikipedia.org/wiki/Working_capital. [Accessed 16 November 2016]