BACHELOR OF BUSINESS MANAGEMENT ( HONOURS )

FINANCIAL MANAGEMENT
BBM 1103

INDIVIDUAL ASSIGNMENT

Prepared for:
MADAM NORZAMZIAH AFZAINIZAM

Prepared by:
NUR AIN SYAFAWANIE BINTI MAHADI

Submission Date:
20 June 2024
 TABLE OF CONTENT’S

Table Of Content’s I

QUESTION’S
Currents Asset Holding :
1. What factors should Ferrum Manufacturing consider when 1
determining the optimal level of current assets to hold?
2. How can Ferrum Manufacturing improve its current asset 3
management to enhance liquidity without sacrificing profitability?
Cash Conversion Cycle :
3. Calculate the cash conversion cycle for Ferrum Manufacturing 5
and analyze its implications for the company’s operations.
4. Suggest strategies to shorten the cash conversion cycle and 7
improve the company’s cash flow position.
Cash Budget :
5. Develop a cash budget for Ferrum Manufacturing based on the 9
provided information.
6. Discuss the importance of cash budgeting for managing working 10
capital effectively. Inventory Management :
a) Evaluate Ferrum Manufacturing’s current inventory management 12
practices and suggest improvements to optimize inventory levels.
b) Analyze the advantages and disadvantages of Ferrum 14
Manufacturing’s reliance on short-term financing options.
c) Recommend alternative financing strategies to reduce the 16
company’s dependence on short-term debt.
Overall Working Capital Management :
7. How can Ferrum Manufacturing integrate various working capital 18
management techniques to optimize its overall liquidity and
profitability?

CONCLUSION’S 20
REFERENCE’S 21

I
 QUESTIONS

CURRENT ASSET HOLDINGS :

1. What factors should Ferrum Manufacturing consider when

determining the optimal level of current assets to hold?

The factor to determine the optimal level of current assets is the first
Cash Flow Requirements to ensure that Ferrum Manufacturing Company
has sufficient cash to cover daily operating expenses and for any unexpected
costs. For this interest to maintain liquidity is important to avoid bankruptcy.
Proper cash flow management to help and ensure the company can pay bills,
salaries and other operating expenses without any interruption. Ferrum
Manufacturing needs to forecast cash inflows and outflows accurately,
considering seasonal variations and possible unexpected expenses. The
second factor is Accounts Receivable Management which is the process of
managing credit sales and collecting payments from customers. Efficient
collection of receivables to ensure stable cash flow and minimize the risk of
bad debts. By implementing effective credit policies and collection procedures
to reduce the time between sales and cash collection, thus being able to
monitor the aging of accounts receivable and take timely action to collect
overdue accounts.

Next, the third factor is Inventory Turnover, which is the rate at which
inventory is sold and replaced in a certain period. High inventory turnover
indicates efficient inventory management and perfect sales, while low turnover
indicates excess inventory or poor sales. To achieve balance Ferrum
Manufacturing needs to meet customer demand and minimize storage costs.
Overstocking can result in higher holding costs and inventory obsolescence,
while insufficient inventory can lead to missed sales opportunities and
customer frustration. The fourth factor is the Credit Policy which is the credit
terms given to customers and received from suppliers. This credit policy
affects cash flow and current asset levels. Ferrum Manufacturing should
reconcile the asset level with the credit company. By way of cheap credit

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terms may cause problems in cash flow. Conversely, a tight credit policy may
increase cash flow but may also decrease sales.

The last factor Market Conditions is the current state of the market,
including economic factors that affect sales and production cycles. These
market conditions affect customer demand, pricing strategies, and the overall
business environment. Ferrum Manufacturing needs to adjust inventory levels
and other current assets in response to economic changes, such as economic
downturns, changes in consumer behavior, or shifts in market demand. Stay
informed about market trends and adjust your asset management strategy
accordingly.

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2. How can Ferrum Manufacturing improve its current asset
management to enhance liquidity without sacrificing profitability?

The steps that need to be improved in Ferrum Manufacturing's current

asset management in increasing liquidity without disrupting the company's
profitability is the first step in Cash Management which is to implement
accurate cash flow forecasts and maintain an adequate buffer of liquid assets.
To assist Ferrum Manufacturing Company in managing daily expenses and
facing any financial emergency without any interruption. For example, Ferrum
Manufacturing needs to plan future income and expenses. Sufficient cash
buffer reserves to cover unexpected expenses. Regularly review the cash flow
forecast to ensure its accuracy and make adjustments if necessary. The
second step of Efficient Inventory Management is to use a Just In Time (JIT)
inventory system to reduce holding costs. Ferrum Manufacturing needs to
reduce storage costs and the risk of inventory obsolescence by ensuring that
the inventory stored is at the minimum required level. For example by
implementing a JIT system that ensures inventory arrives on time to meet
production and customer demand. Additionally, use data analytics to
accurately forecast demand and adjust inventory orders. Audit inventory
periodically to identify and eliminate excess or obsolete inventory.

The third step of Supplier Relations is to negotiate better payment

terms with suppliers to improve cash flow. Ferrum Manufacturing needs to
increase cash flow by extending payment periods and reducing financial
stress. Such as establishing good long-term relationships with suppliers to
facilitate the negotiation of better payment terms. Negotiating discounts for
early payment and longer credit terms to increase financial flexibility and
regularly review and re-evaluate supplier contract terms to ensure they are in
line with the company's financial needs. The fourth step of Technology Use
is to use inventory management software to optimize stock levels and
automate receivables tracking. Ferrum Manufacturing should improve
accuracy and efficiency in inventory management and accounts receivable.
Use inventory management software to monitor stock levels in real time and
identify stock replenishment needs. Additionally, accounts receivable software

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to track customer payments and generate accounts receivable reports by
integrating this system with the company's financial system for better
monitoring and reporting.

The last step of Debt Collection is to strengthen the credit policy and
use an effective collection strategy by ensuring a stable cash flow by reducing
the debt collection period and the risk of bad debt i.e. old debt. Ferrum
Manufacturing should set clear and firm credit terms to customers based on
their credit rating by using an automatic reminder system to remind customers
of upcoming payments and provide incentives for early payments and impose
penalties for late payments.

Ferrum Manufacturing Company needs to improve asset management

while requiring a proactive and integrated approach. Strong cash
management, efficient inventory management, effective collection of
receivables, use of appropriate technology and good relationships with
suppliers all play an important role in ensuring the company's liquidity and
operational efficiency. Implementing these best practices helps companies
maximize profits and reduce financial risk.

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 CASH CONVERSION CYCLE :

3. Calculate the cash conversion cycle for Ferrum Manufacturing and

analyze its implications for the company’s operations.

 Days Inventory Outstanding (DIO)

 Days Sales Outstanding (DSO)
 Days Payables Outstanding (DPO)

FORMULA

Cash = Days Inventory + Days Sales - Days Payables

Conversion Outstanding Outstanding (DSO) Outstanding (DPO)
Cycle (DIO)

CALCULATION

a. Days Inventory Outstanding (DIO)

 800,000 
DIO     365days
 3,000,000 

DIO  97.33days

b. Days Sales Outstanding (DSO)

 600,000 
DSO     365days
 5,000,000 

DSO  43.8days

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c. Days Payable Outstanding (DPO)

 400,000 
DPO     365days
 3,000,000 

DPO  48.7 days

d. Cash Conversion Cycle (CCC)

CCC  DIO  DSO  DPO

CCC  97.33  43.8  48.7

CCC  92.43days

IMPLICATION

Cash Conversion Cycle (CCC) of approximately 92.43 days indicates

the number of days it takes for the company to convert the investments in
inventory and other resources into cash flows from sales. This relatively long
cycle implies that Slower Cash Flow, the company takes about 92.43 days to
turn its inventory into cash, suggesting a slower cash flow cycle. Increased
Working Capital Needs, a longer CCC means that more capital is tied up in
the operating cycle, increasing the need for working capital to sustain
operations. By improving the components of the CCC, such as reducing DIO
and DSO or increasing DPO, the company can enhance its cash flow
efficiency and reduce the reliance on external financing for working capital.

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4. Suggest strategies to shorten the cash conversion cycle and
improve the company’s cash flow position.

Ferrum Manufacturing Company should implement strategies to

shorten the Cash Conversion Cycle (CCC), increase cash flow and reduce
dependence on external financing for working capital. Efficient inventory
management, proactive receivables management, and strategic payable
management together contribute to a more robust and efficient working capital
cycle, improving overall financial and operational efficiency.

The first recommendation is Inventory Management which is to

reduce Days Inventory Outstanding (DIO) by optimizing stock levels and
increasing turnover rates. Implement a Just In Time (JIT) strategy by
minimizing inventory holding by ordering and receiving goods only when
needed in the production process. Next, Periodic Inventory Audits using
periodic audits help identify slow-moving or obsolete stock, which allows for
adjustments in purchasing practices. Supply Chain Proximity Monitoring to
work with suppliers to ensure timely delivery of raw materials and products,
reducing the need for excess inventory. In addition, using Inventory
Management Software by tracking stock levels directly and predicting demand
more accurately and automating the reordering process.

The second recommendation is Debtor Management by shortening

Days Sales Outstanding (DSO) by improving credit policy and collection
efforts. The strategy that needs to be used is Strengthen the Credit Policy by
setting stricter credit conditions for new customers and periodically check the
credit of existing customers to reduce the risk of late payments. In addition,
Ferrum Manufacturing may make Early Payment Discount Offers that provide
incentives to customers to pay invoices early, such as small discounts for
payments made within a certain period. Next, Build a Dedicated Collections
Team to respond to late invoices and reduce the average collection period.
Automate Invoice Delivery and Reminders by using an automated system to
send invoices promptly and remind customers about overdue invoices.

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 The last suggestion of Creditor Management is to extend Days
Payables Outstanding (DPO) by negotiating longer payment terms with
suppliers. The strategy that Ferrum Manufacturing needs to do is Negotiate
Longer Payment Terms by working with suppliers to get longer payment terms,
which can increase cash flow by delaying cash outflows. Additionally,
Leveraging Supplier Relationships by building strong relationships with key
suppliers to obtain better terms and flexibility in payment schedules. Next,
Purchase Consolidation by combining orders to negotiate better terms and
bulk discounts, including longer payment terms. Finally Use Trade Credit by
maximizing the use of trade credit provided by suppliers as a source of short-
term financing to increase working capital.

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CASH BUDGET :

5. Develop a cash budget for Ferrum Manufacturing based on the

provided information.

Ferrum Manufacturing Company

Cash Budget for the Current Year

Opening Balance RM 200,000

Inflow

Accounts Receivable RM 600,000

Total Inflows RM 600,000

Outflow

Payment for Inventory (COGS) RM 3,000,000

Operating Expenses RM 1,000,000

Accounts Payable RM 400,000

Total Outflow RM 4,400,000

Surplus / Deficit -RM 3,800,000

Closing Balance -RM 3,600,000

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6. Discuss the importance of cash budgeting for managing working
capital effectively. Inventory Management:

The cash budget plays an important role in the financial management

of Ferrum Manufacturing Company by ensuring adequate liquidity, controlling
costs, and supporting strategic planning. By continuously monitoring and
forecasting cash flow, companies can manage their finances more effectively,
avoid liquidity problems and achieve long-term business goals.

The importance of cash budgeting as in Liquidity Management is to

ensure that Ferrum Manufacturing Company has sufficient cash to meet
obligations. This is very important in meeting the obligations in the cash
budget helps in predicting cash inflows and outflows, ensuring that the
company can meet short-term liabilities such as salaries, payments to
suppliers, and other operating expenses. In addition, avoiding insolvency by
maintaining sufficient liquidity, the company can avoid situations where it may
fail to meet its obligations, which could lead to insolvency.

Next, the importance of budgeting in Cost Control by monitoring

expenses and identifying cost savings opportunities. With Expense Monitoring
this cash budget allows Ferrum Manufacturing Company itself to monitor
expenses more closely, identify areas where expenses may exceed budget
and take steps to control costs. In addition, Savings Opportunities by
analyzing in detail cash outflows, companies can identify opportunities for cost
savings, such as reducing unnecessary expenses or renegotiating contracts
with suppliers.

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 The final importance of budgeting is Strategic Planning by aligning
cash flow management with long-term business goals and strategies.
Strategic planning in this budget must be in line with long-term goals to help
ensure that cash flow management is in line with Ferrum Manufacturing
Company's long-term goals and strategies, such as investment in new
projects, business expansion or infrastructure improvements. In addition,
better decision-making in cash flow management is also important to ensure
that companies make better decisions about investment, spending and capital
management, which can have a positive impact on growth and financial
stability in the long term.

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a) Evaluate Ferrum Manufacturing’s current inventory management
practices and suggest improvements to optimize inventory levels.

Efficient inventory management is key to optimizing costs, increasing

cash flow and ensuring customer satisfaction. By adopting improvement
strategies such as using JIT, inventory management technology, accurate
demand forecasting, strong supplier relationships, and periodic audits, Ferrum
Manufacturing Company was able to improve their inventory management
process and achieve a competitive advantage in the market.

Current Practices by analyzing the turnover rate need to assess how

quickly inventory is moving through the system by calculating the turnover
rate. This helps identify slow moving items. Ferrum Manufacturing Company
also needs to monitor stock levels to ensure that stock is in sufficient condition
according to inventory to meet demand without running out of stock, which
can affect sales and customer satisfaction. Additionally, identify slow-moving
items by reviewing inventory to identify items that do not move quickly, which
can cause additional storage costs and obsolescence.

A suggestion about improvements to optimize inventory levels is to

use Just In Time (JIT) which is to minimize inventory levels by receiving
goods only when they are needed in the production process. To reduce
storage costs, improve cash flow efficiency and reduce the risk of inventory
obsolescence. The second improvement is Utilizing Technology by
implementing inventory management software for real-time tracking and
forecasting that provides real-time visibility into stock, automates the reorder
process, and improves consistency in inventory management. Additionally,
improvements on Improving Demand Forecasting by using historical data
and market analysis to accurately forecast demand to reduce the risk of out-
of-stocks or overstocks, improve customer satisfaction, and optimize inventory
planning. Next, Supplier Relations which is establishing strong relationships
with suppliers for flexible and reliable delivery and improving delivery
timeliness, obtaining better payment terms and ensuring consistent inventory
availability. Finally, Periodic Audits, Ferrum Manufacturing Company should

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conduct inventory audits periodically to ensure accuracy and identify
discrepancies and detect inaccuracies in inventory records, reduce the risk of
theft or loss and ensure accurate records for better planning.

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b) Analyze the advantages and disadvantages of Ferrum
Manufacturing’s reliance on short-term financing options.

The Advantage of Ferrum Manufacturing Company's reliance on short-

term financing options, the first advantage of Quick Access to Funds is the
ability to immediately allow the company to obtain immediate cash flow to
meet urgent needs, such as paying salaries, suppliers or dealing with
unexpected operating costs. The fast process is also the approval process
and the disbursement of funds is often faster than financing suitable for
emergency situations or urgent business opportunities. The second
advantage is Flexibility, which is the use according to needs can be used
flexibly according to the needs of Ferrum Manufacturing without a strict long-
term commitment. Cash management also allows companies to better
manage daily cash flow, filling the gap between expenses and income. The
last advantage is Lower Start-up Costs low upfront costs with short-term
financing often has lower upfront costs such as preparation fees and
administration costs compared to long-term financing. In addition, collateral
requirements are usually lower, which can reduce the risk for small and
medium-sized companies.

Next, the Disadvantage of Ferrum Manufacturing Company's reliance

on short-term options is the first disadvantage of Higher Interest Rates which
is the cost of financing in the short term usually has a higher interest rate,
making it more expensive in the long term if used continuously. High interest
costs can increase the company's financial burden and reduce the company's
net profit. The second disadvantage of Short Repayment Period is cash flow
pressure that requires repayment in a short period of time, which can squeeze
the company's cash flow and affect the ability to meet other financial
obligations. Risk of non-compliance if Ferrum Manufacturing Company fails to
meet repayment terms, it could face penalties or legal action from lenders.
The last disadvantage is Dependency Risk financial instability in excessive
reliance on short-term financing can lead to financial instability, especially if
the company cannot manage repayments effectively. Increased debt burden if
Ferrum Manufacturing Company frequently makes short-term payments that

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allow an increase in debt burden in the entire company, this can increase
financial risk and affect the ability to obtain long-term financing in the future.

The conclusion is that reliance on short-term financing offers several

advantages such as quick access to funds, flexibility and lower start-up costs.
However, it also carries some disadvantages such as higher interest rates,
short repayment periods, and the risk of excessive dependence. Therefore, it
is important for Ferrum Manufacturing to carefully assess their financial needs
and manage short-term financing carefully to ensure long-term financial
stability.

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c) Recommend alternatives financing strategies to reduce the
company’s dependence on short-term debt.

An alternative financing strategy to reduce the company's dependence

on debt in the short term is the factoring concept, which is to sell accounts
receivable to a third party, the factoring provider, with a discount to get cash
immediately. This concept has pros and cons. The advantage is being able to
access cash immediately by providing immediate cash flow and increasing the
company's liquidity. Next, reduce the credit risk from third parties who take
over the customer's credit risk. The downside is that the costs, ie fees and
discounts charged by the factoring provider, can be high with customer
relationships that give factors that may contact the company's customers
directly and can affect business relationships. In addition, the second concept
of Equity Financing is to raise funds by selling company shares to investors.
This benefits Ferrum Manufacturing Company in that the company does not
have to pay back loans or interest and further encourages growth with equity
investors usually bringing additional experience, network and support to the
company. The downside is the dilution of control, i.e. the original owner of the
company may lose some control and interest in the company, as well as
transaction costs, i.e. the share offering process can be complicated and
expensive.

In addition, the concept of Crowdfunding is to use an online platform

to collect a small amount of money from a large number of people. This
provides access to capital, enabling fundraising from many small investors
without having to go through financial institutions. The crowdfunding process
can also serve as a marketing tool to introduce new products or services to
the market. Next, this is one of the marketing requirements that requires a
significant marketing effort to attract the attention of investors. High
competition in companies that use crowdfunding platforms that can make it
difficult for a company to stand out. Finally Equity Financing, using inventory
as collateral to obtain a loan. This also increases cash flow without having to
sell important assets in the company and can also encourage better inventory
management because the company needs to maintain inventory value that

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can be used as collateral. In addition, the interest cost of issuing this type of
loan usually has a high interest rate with the assessment of the inventory
used as collateral may be assessed lower by the lender.

Ferrum Manufacturing Company needs to consider their financial

situation, capital needs and long-term goals before choosing an appropriate
financing strategy. Factoring, inventory financing, equity financing,
crowdfunding are options that can help increase cash flow and support
business growth.

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OVERALL WORKING CAPITAL MANAGEMENT :

7. How can Ferrum Manufacturing integrate various working capital

management techniques to optimize its overall liquidity and
profitability?

Integrating various working capital management techniques requires a

comprehensive approach, the use of technology, periodic reviews and
ongoing training. By applying these strategies, companies can optimize
liquidity, improve operational efficiency and achieve long-term financial
stability.

Ferrum Manufacturing Company should do a Comprehensive

Approach that is by combining cash management, inventory, debtors, and
creditors to optimize liquidity. Cash management in this strategy is to ensure
sufficient cash flow for daily operations and emergency needs. Inventory
Management that uses techniques such as Just In Time (JIT) to reduce
storage costs and increase inventory turnover. Debtor management is to
tighten the credit policy and speed up debt collection. Accounts Payable
Management to extend the payment period to suppliers without affecting
business relationships. Next, the Use of Technology by implementing an
integrated financial management system for real-time monitoring and making
more accurate decisions. The use of technology in the ERP system strategy
which is the Enterprise Resource Planning (ERP) system to integrate all
aspects of finance, inventory and operations. Data analytics that use data
analytics to forecast demand, identify trends and make more informed
decisions.

In addition, Periodic Review which is to continuously monitor and

adjust strategies based on financial performance and market conditions. The
performance evaluation strategy is to periodically evaluate key financial
metrics such as inventory turnover, debt collection period and cash flow.
Tactical adjustments that adjust strategies based on performance data and
market feedback to ensure effective working capital management. Finally,

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Training and Development is investing in employee training to improve
efficiency in working capital management. The strategy is like a training
program that holds periodic training programs for employees on financial
management techniques, technology use and data analytic. Skills
development that focuses on the development of specific skills needed to
manage certain aspects of working capital such as inventory management
and cash management. Market awareness by training employees to
understand changes in the market and how to adapt working capital strategies
to those changes.

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 CONCLUSIONS

The management of Ferrum Manufacturing Company exhibits a

strategic and integrative approach to optimizing its operations and financial
health. By employing a comprehensive strategy that includes effective cash
management, inventory control, receivables collection, and payables
management, Ferrum Manufacturing ensures robust liquidity and operational
efficiency.Ferrum Manufacturing's focus on maintaining adequate cash flow
for daily operations and unforeseen expenses showcases its commitment to
financial stability. By employing cash forecasting and maintaining a buffer of
liquid assets, the company mitigates risks associated with liquidity
shortages.Through the implementation of Just-In-Time (JIT) inventory
systems and leveraging inventory management software, Ferrum
Manufacturing optimizes stock levels, reducing holding costs and minimizing
obsolescence. This approach not only improves turnover rates but also aligns
inventory levels closely with actual demand, enhancing responsiveness and
reducing waste.

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 REFERENCES

Investopedia : current assets

https://www.investopedia.com/terms/c/currentassets.asp

Cash Conversion Cycle (CCC)

https://www.highradius.com/resources/Blog/what-is-cash-conversion-
cycle/

Definition Cash Budget and How to Calculate

https://www.indeed.com/career-advice/career-development/cash-
budgets
https://navi.com/blog/cash-budget/

Advantages and Disadvantages of short term financing options

https://www.lendingstream.co.uk/blog/advantages-and-disadvantages-
of-short-term-loans/

Definition of Finance Strategy

https://www.gartner.com/en/finance/glossary/finance-strategy

5 Strategirs for Effective Working Capital Management

https://www.hourly.io/post/working-capital-management

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