(a) PQR Ltd. expanded its business by purchasing new machinery and increasing production. However, due to poor financial planning, the company is…

(a) Importance of Financial Management cannot be over-emphasized. It is, indeed, the key to successful business operations. Without proper administration of finance, no business enterprise can reach at its full potentials for growth and success. Money is to an enterprise, what oil is to an engine. Financial Management is all about planning investment, funding the investment, monitoring expenses against budget and managing gains from the investments. Financial management means management of all matters related to an organization's finances. The best way to demonstrate the importance of good financial management is to describe some of the tasks that it involves:- (a) Taking care not to over-invest in fixed assets (b) Balancing cash-outflow with cash-inflows (c) Ensuring that there is a sufficient level of short-term working capital (d) Setting sales revenue targets that will deliver growth (e) Increasing gross profit by setting the correct pricing for products or services (f) Controlling the level of general and administrative expenses by finding more cost-efficient ways of running the day-to-day business operations, and (g) Tax planning that will minimize the taxes a business has to pay. (b) Foreign Bonds Sl. No. Name of Bond Salient Features 1. Foreign Currency Convertible Bond (FCCB) This bond comes at a very low rate of interest. The advantage to the issuer is that the issuer can get foreign currency at a very low cost. The risk is that in case the bond has to be redeemed on the date of maturity, the issuer has to make the payment and at that time the issuer may not have the money. 2. Plain Vanilla Bond The issuer would pay the principal amount along with the interest rate. This type of bond would not have any options. This bond can be issued in the form of discounted bond or can be issued in the form of coupon bearing bond. 3. Convertible Floating Rate Notes (FRN) A convertible FRN is issued by giving its holder an option to convert it into a longer term debt security with a specified coupon It protects an investor against falling interest rate The long-term debt security can be sold in the market and the investor can earn profit Capital gain is not applicable to FRN 4. Drop Lock Bond It is a Floating Rate Note with a normal floating rate The floating rate bond would be automatically converted into fixed rate bond if interest rate falls below a predetermined level The new fixed rate stays till the drop lock bond reaches its maturity The difference between the convertible floating rate note and drop lock bond is that the former is a long option structure and the later one is a short option structure 5. Variable Rate Demand Obligations A normal floating rate note with a nominal maturity The holder of the floating rate note can sell the obligation back to the trustee at par plus accrued interest It gives the investor an option to exit, so it is more liquid than the normal FRN 6. Yield Curve Note (YCN) It is a structured debt security Yield increases when prevailing interest rate declines Yield decreases when prevailing interest rate increases This is used to hedge the interest rate This works like inverse floater 7. Euro Bond Euro bonds are issued or traded in a country using a currency other than the one in which the bond is denominated. This means that the bond uses a certain currency, but operates outside the jurisdiction of the Central Bank that issues that currency. Eurobonds are issued by multinational corporations, for example, a British company may issue a Eurobond in Germany, denominating it in U.S. dollars. It is important to note that the term has nothing to do with the euro, and the prefix "euro-" is used more generally to refer to deposit outside the jurisdiction of the domestic central bank (c) Some of the factors which need to be considered while planning for working capital requirement are: 1. Need for Cash: Identify the cash balance which allows for the business to meet day-to-day expenses but reduces cash holding costs (example loss of interest on long term investment had the surplus cash invested therein). 2. Desired level of Inventory: Identify the level of inventory which allows for uninterrupted production but reduces the investment in raw materials and hence increases cash flow. The techniques like Just in Time (JIT) and Economic order quantity (EOQ) are used for this. 3. Receivables: Identify the appropriate credit policy, i.e., credit terms which will attract customers, such that any impact on cash flows and the cash conversion cycle will be offset by increased revenue and hence Return on Capital (or vice versa). The tools like Early Payment Discounts and allowances are used for this. 4. Short-term Financing Options: Inventory is ideally financed by credit granted by the supplier. However, depending on the cash conversion cycle, it may be necessary to utilize a bank loan (or overdraft), or to "convert debtors to cash" through "factoring" in order to finance working capital requirements. 5. Nature of Business: For e.g. in a business of restaurant, most of the sales are in Cash. Therefore, need for working capital is very less. On the other hand, there would be a higher inventory in case of a pharmacy or a bookstore. 6. Market and Demand Conditions: For e.g. if an item's demand far exceeds its production, the working capital requirement would be less as investment in finished goods inventory would be very less with continuous sales. 7. Technology and Manufacturing Policies: For e.g. in some businesses the demand for goods is seasonal, in that case a business may follow a policy for steady production throughout the whole year or rather may choose a policy of production only during the demand season. 8. Operating Efficiency: A company can reduce the working capital requirement by eliminating waste, improving coordination, process improvements etc. 9. Price Level Changes & Exchange Rate Fluctuations: For e.g. rising prices necessitate the use of more funds for maintaining an existing level of activity. For the same level of current assets, higher cash outlays are required. Therefore, the effect of rising prices is that a higher amount of working capital is required. Another example would be unfavorable exchange rate movement in case of imported raw materials would warrant additional cost of same.