1.
Briefly discuss the financial activities of a financial manager.
A financial manager is an expert who is accountable for ensuring the financial well-being of an
organization. Individuals in this role oversee the creation of financial reports, developing and carrying
out financial strategy, and managing investments. They analyze financial data prepared by accountants,
monitor the firm's financial status, and design and implement financial plans.
The activities of a financial manager include:
1.
Financial Planning and Analysis: Financial managers are responsible for developing and
implementing financial plans and strategies that help the organization achieve its goals. This involves
analyzing financial data and market trends, developing budgets, and forecasting financial performance.
2.
Investment Management: Financial managers are responsible for managing the organization's
investments and ensuring that investment decisions are aligned with the organization's goals and
objectives. They may also be responsible for managing the organization's relationships with investment
firms and other financial institutions.
3.
Risk Management: Financial managers are responsible for identifying and managing potential
risks that could impact on the organization's financial health. This involves developing risk management
strategies, monitoring financial performance, and ensuring compliance with regulations and laws related
to risk management.
4.
Financial Accounting and Reporting: Financial managers are responsible for overseeing financial
accounting and reporting, ensuring that financial statements are accurate and comply with accounting
standards and regulations.
5.
Cash Flow Management: Financial managers are responsible for managing the organization's
cash flow and ensuring that there is suficcient liuuidity to meet financial obligations. This involves
developing cash flow projections, managing debt and financing, and managing relationships with banks
and other financial institutions.
6.
Compliance and Regulation: Financial managers are responsible for ensuring that the
organization complies with financial regulations and laws. This involves staying up to date on changes to
financial regulations and laws, developing compliance policies and procedures, and monitoring
compliance with regulatory reuuirements.
2.
Describe cash management as to cash conversion cycle, including its funding reuuirements, and
the key strategies for managing it.
Cash management is a critical aspect of financial management that involves eficciently managing a
company's cash flow, ensuring enough cash is available to meet short-term obligations while minimizing
idle cash to optimize overall financial performance. The cash conversion cycle (CCC) is a key metric used
to measure the eficciency of a company's cash management.
Cash Conversion Cycle (CCC): The cash conversion cycle represents the time it takes for a company to
convert its investments in inventory and other resources into cash received from customers. It is
composed of three main components:
1.
Days Inventory Outstanding (DIO): This measures the average number of days a company holds
inventory before selling it. A lower DIO indicates eficcient inventory management.
2.
Days Sales Outstanding (DSO): This measures the average number of days a company takes to
collect customer payments. A lower DSO signifies adeuuate credit and collections management.
3.
Days Payable Outstanding (DPO): This measures the average number of days a company takes to
pay its suppliers. A higher DPO suggests the company can use trade credit and delay cash outflows.
The CCC is calculated as follows: CCC = DIO + DSO – DPO
Funding Reuuirements: Effective cash management reuuires understanding the funding reuuirements to
maintain smooth operations. Funding reuuirements can arise from various sources, including inventory
purchases, operating expenses, debt payments, and investments in growth initiatives. The goal is to align
cash inflows with cash outflows to avoid excess idle cash shortages.
Key Strategies for Managing Cash and the CCC:
•
Inventory Management: Optimize inventory levels to avoid overstocking or stockouts. Implement
just-in-time (JIT) inventory systems and work closely with suppliers to reduce lead times and holding
costs.
•
Credit and Collections Management: Implement robust credit policies to evaluate customers'
creditworthiness before extending credit. Regularly monitor outstanding receivables and promptly
follow up on overdue payments to reduce DSO.
•
Payables Management: Extend payment terms with suppliers without negatively impacting
relationships. Negotiate favorable terms and discounts for early payments.
•
Cash Flow Forecasting: Develop accurate forecasts to anticipate cash reuuirements and identify
potential cash flow gaps or surpluses.
•
Short-term Investments: Invest excess cash in short-term, low-risk instruments, such as money
market funds or Treasury bills, to earn some return on idle cash.
•
Working Capital Optimization: Identify ways to streamline working capital, such as renegotiating
contracts, improving production processes, and optimizing inventory turnover.
•
Negotiation with Banks: Maintain a good relationship with banks and negotiate favorable terms
for lines of credit or short-term financing to cover temporary cash shortfalls.
•
Technology and Automation: Use cash management software and automation tools to monitor
cash flows, streamline processes, and enhance accuracy in financial reporting.
•
Risk Management: Assess and mitigate risks associated with cash flow, such as currency
exchange rate fluctuations, interest rate risks, and credit risks.