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GRADUATE SCHOOL
MASTER IN BUSINESS ADMINISTRATION
MBA 225 - FINANCIAL MANAGEMENT
Final Examination

I. ESSAY – Discuss exhaustively the following essay questions.

1. Differentiate the different types of treasury risk and explain the treasury risk
techniques?

Answer: Treasury risk refers to the potential for financial loss due to various
factors affecting a company’s treasury operations. The main types of treasury risk
include:

Liquidity Risk: This is the risk that an organization will not be able to meet its
short-term financial obligations due to an imbalance between cash inflows and
outflows. It can arise from unexpected expenses, poor cash flow management, or
market conditions that limit access to funding.

Interest Rate Risk: This type of risk arises from fluctuations in interest rates that
can affect the cost of borrowing and the value of investments. For example, if a
company has fixed-rate debt and interest rates rise, it may miss out on lower
borrowing costs available in the market.

Foreign Exchange Risk: Companies engaged in international trade face foreign

exchange risk due to changes in currency exchange rates. This can impact the
value of receivables and payables denominated in foreign currencies, leading to
potential losses.

Credit Risk: This is the risk that a counterparty will default on its contractual
obligations, leading to financial loss for the organization. In treasury operations,
this could involve risks associated with lending activities or investments in
securities.

Operational Risk: This encompasses risks arising from internal processes, systems
failures, human errors, or external events that disrupt treasury operations.
Operational risks can lead to financial losses and reputational damage.

Market Risk: Market risk involves exposure to adverse movements in market

prices, including equity prices, commodity prices, and interest rates. Treasury
departments must manage their investment portfolios against these fluctuations.

Regulatory Risk: Changes in laws and regulations can impact treasury operations
significantly. Compliance with new regulations may require adjustments in
practices or incur additional costs.

2. What is the main reason why a company uses standard costing and why there’s a
need to use standard costing? Explain why standard costing is significant in
financial management?

Answer: Standard costing is a method that involves assigning a “standard” cost to

each unit of production, based on estimated material, labor, and overhead costs.
Companies use standard costing primarily to improve cost control, simplify
budgeting, and streamline decision-making processes. Here’s why it’s significant
and widely used:
 1. Cost Control: Standard costing helps companies manage and control costs
by setting predetermined cost levels for production. When actual costs are
compared to standard costs, any variances (differences) become immediately
visible, allowing management to investigate and address inefficiencies. This helps
in keeping costs within budget and identifying areas for improvement.

2. Budgeting and Planning: Standard costs are useful for budgeting and
financial planning. Because standard costs are established based on historical data,
industry standards, and expectations, they provide a baseline that management can
use to predict expenses and set performance targets. This facilitates more accurate
and realistic financial planning.

3. Performance Measurement: By comparing actual performance to standard

costs, companies can assess how well they are managing resources. Variance
analysis (analyzing the differences between actual and standard costs) allows
companies to measure productivity, efficiency, and cost management. This helps
managers make informed decisions about processes, pricing, and resource
allocation.

4. Simplifying Inventory Valuation: Standard costing simplifies inventory

valuation by assigning consistent costs to products, regardless of actual expenses.
This consistency makes it easier to calculate the cost of goods sold (COGS) and
end inventory, simplifying the financial reporting process and ensuring compliance
with accounting standards.

5. Pricing and Profitability Analysis: Knowing the standard costs allows

companies to set prices based on targeted profit margins. By comparing these
prices to actual costs, they can also assess profitability and identify potential
pricing adjustments to maintain competitiveness.

In financial management, standard costing is significant because it enables better

control over the organization’s finances. By offering a benchmark, it makes
variances immediately apparent and guides managerial actions. Ultimately, it aids
in reducing waste, enhancing operational efficiency, and optimizing profitability,
which are key financial management goals.

3. Explain the meaning of marginal costing and what are the benefits can a company
gain in utilizing marginal costing for an efficient financial operation?

Answer: Marginal costing is a costing technique that focuses on how costs change
with an increase or decrease in production volume. It categorizes costs into two
types:

Variable Costs: These costs fluctuate directly with the level of production.
Examples include direct materials, direct labor, and variable overhead.

Fixed Costs: These costs remain constant regardless of the production volume.
Examples include rent, salaries, and insurance.

Benefits of Marginal Costing for Efficient Financial Operations

Marginal costing offers several advantages for businesses:

Informed Decision-Making:

Pricing Strategies: By understanding the marginal cost of each unit, businesses can
make informed decisions about pricing strategies. They can set prices that cover
variable costs and contribute to fixed costs and profit.

Production Levels: Marginal costing helps determine the optimal production level
by comparing the marginal cost to the marginal revenue.
 Product Mix Decisions: When a company produces multiple products, marginal
costing can help identify the most profitable product mix.

Improved Cost Control:

Variable Cost Control: By focusing on variable costs, businesses can identify areas
where cost reductions can be made without affecting production levels.

Fixed Cost Management: While fixed costs are less controllable in the short term,
marginal costing can help in long-term planning and decision-making regarding
fixed costs.

Enhanced Profit Planning:

Break-Even Analysis: Marginal costing is crucial for calculating the break-even

point, which is the level of sales needed to cover both variable and fixed costs.

Profit Projections: By analyzing the contribution margin (sales revenue minus

variable costs), businesses can forecast profits at different levels of sales.

Better Inventory Valuation:

Marginal Costing Valuation: By valuing inventory at marginal cost, businesses can

avoid distortions caused by fixed costs, which can be more accurate for decision-
making.

Simplified Cost Accounting:

Reduced Complexity: Marginal costing simplifies the cost accounting process by

focusing on the relationship between costs and production volume.

By effectively utilizing marginal costing, businesses can make more informed

decisions, improve cost control, enhance profit planning, and achieve greater
operational efficiency.

4. Explain how and what should be the process that a company becomes an Initial
Public Offerings (IPO)?

Answer: When a private company decides to go public through an Initial Public

Offering (IPO), it sells shares to the public for the first time. Going public can
provide the company with capital for growth, expand its market presence, and
allow early investors to realize returns on their investments. However, the IPO
process is complex and requires a series of structured steps. Here’s a breakdown of
the typical IPO process:

1. Decision to Go Public

• Assess Readiness: The company’s management and board of directors first

assess if the company is ready to go public. This includes evaluating the
company’s financial health, growth potential, and readiness to handle public
scrutiny.

• Set Objectives: The company should establish clear goals for going public,
such as raising capital, expanding, or providing liquidity for investors.

2. Hire Advisors and Underwriters

• Select Underwriters: The company hires an investment bank or a group of

underwriters to manage the IPO. The underwriters help structure the deal, set the
share price, and sell the shares to the public. Major banks like Goldman Sachs,
Morgan Stanley, or JPMorgan Chase are commonly involved in IPOs.
 • Assemble the IPO Team: The IPO team usually includes investment bankers,
legal advisors, accountants, and public relations experts. Each of these parties
plays a role in ensuring regulatory compliance, financial transparency, and a
successful IPO launch.

3. Due Diligence and Regulatory Filings

• Financial Audit and Due Diligence: The company undergoes a rigorous

financial audit to ensure all financial statements are accurate and complete. Legal
and accounting teams conduct due diligence to identify any legal, financial, or
operational risks.

• File with the Securities and Exchange Commission (SEC): In the U.S., the
company files a registration statement with the SEC (known as Form S-1), which
includes detailed information about the business, finances, risks, and how the IPO
proceeds will be used. Other countries have similar regulatory bodies.

• SEC Review: The SEC reviews the registration statement for completeness
and compliance with regulations. The SEC may request revisions or additional
disclosures to ensure that potential investors have all necessary information.

4. Determine the IPO Structure and Pricing

• Decide on Offering Details: The company and its underwriters decide on the
total number of shares to be issued and the price range per share. They may use a
book-building process, where they gauge investor interest to determine an
appropriate offering price.

• Set the Price: Based on investor feedback and market conditions, the
underwriters and company finalize the IPO price shortly before the offering.

5. Marketing and Roadshow

• Roadshow: The company’s executives, along with underwriters, present the

company’s business model, growth strategy, and financials to potential
institutional investors through a “roadshow.” This is a critical stage where the
company seeks to generate interest in its shares.

• Public Relations Strategy: The company works with PR specialists to build a

positive image and communicate its growth story to potential investors, often
through media appearances and investor presentations.

6. IPO Pricing and Going Public

• Final Pricing: Once the roadshow is complete, the final IPO price is set, based
on demand and market conditions.

• Launch on Exchange: The company’s shares are listed on a public stock

exchange (e.g., NYSE or NASDAQ in the U.S.), and trading begins. The company
officially becomes public, allowing investors to buy and sell shares on the open
market.

7. Post-IPO Period and Compliance

• Initial Market Reaction: After going public, the company monitors the market

5. How financial restructuring be applied in financial operation?

Answer: Financial restructuring is a process used by companies to reorganize their

financial structure, which can involve adjusting the mix of debt and equity,
refinancing existing debts, or re-evaluating assets and liabilities. It’s often applied
in financial operations to improve a company’s financial health, streamline
operations, and support long-term sustainability. Here’s how financial
restructuring can be effectively used in financial operations:

1. Debt Restructuring

• Refinancing or Extending Debt Maturities: Companies may refinance existing

debt to take advantage of lower interest rates or extend the repayment period to
reduce short-term cash flow pressure. By lowering interest payments or spreading
out debt obligations, they can improve liquidity and manage operational expenses
more effectively.

• Debt-for-Equity Swaps: In some cases, companies convert part of their debt

into equity, thus reducing the overall debt load and avoiding default. This can
reduce financial strain, improve balance sheet health, and make operations more
sustainable.

• Negotiating New Terms: Financial restructuring can involve negotiating better

terms with creditors, like reducing interest rates, modifying repayment schedules,
or securing partial forgiveness of debt. This enhances cash flow for operational
expenses, capital investment, or other strategic needs.

2. Equity Restructuring

• Issuing New Equity: Companies might issue new shares to raise capital and
reduce reliance on debt. This provides funds for operations, investments, or debt
repayments, though it can dilute existing ownership. By using equity, companies
can decrease their debt-to-equity ratio, improving financial stability and making it
easier to finance operations.

• Buybacks: Alternatively, if a company has surplus cash or underutilized

assets, it might repurchase shares to boost shareholder value and streamline capital
structure. This can improve stock price and consolidate ownership among
remaining shareholders.

3. Asset Restructuring

• Selling Non-Core Assets: Companies may sell off underperforming or non-

essential assets to raise cash. These funds can then be allocated to core operations,
debt repayment, or strategic investments. Divesting from non-core operations
allows companies to focus resources on areas with the highest potential returns.

• Leasing or Sale-Leaseback Arrangements: Some companies might choose to

sell assets, like property or equipment, and then lease them back to maintain
operational continuity. This frees up capital tied up in fixed assets, which can then
be reinvested in growth initiatives.

4. Improving Operational Efficiency

• Reducing Operational Costs: Financial restructuring often includes measures

to streamline costs, which may involve renegotiating supplier contracts,
downsizing, or automating processes to improve efficiency. These measures help
the company reduce overhead and allocate funds more effectively.

• Enhancing Cash Flow Management: Through restructuring, companies

implement better cash flow practices, such as optimizing inventory levels,
tightening credit terms with customers, or improving receivables collection. This
ensures the business has enough cash on hand to support ongoing operations.

5. Tax Optimization

• Restructuring for Tax Efficiency: Some companies restructure their debt and
equity mix to optimize tax benefits, such as interest deductibility on debt or capital
 gains on equity. A more tax-efficient structure reduces the company’s overall tax
burden, freeing up cash for reinvestment in the business.

• Reorganizing Subsidiaries: Companies may reorganize subsidiaries, merge

entities, or adjust geographic locations to take advantage of favorable tax
treatments. This can be part of a larger financial restructuring strategy to increase
net income and enhance long-term operational success.

6. Stakeholder Management and Governance

• Improving Stakeholder Confidence: Financial restructuring demonstrates a

commitment to stabilizing the company, which can build confidence among
investors, lenders, and suppliers. Strengthening stakeholder relationships can lead
to better financing terms, customer loyalty, and supplier agreements that benefit
operations

6. Discuss Mutual Funds, Bond Valuation, Capital market Instrument, Investment

Banking, and Securities Market.

Answer: Mutual Funds

A mutual fund is an investment vehicle that pools money from many investors to
purchase securities like stocks, bonds, or other assets. A professional fund
manager oversees the fund's investments, aiming to achieve specific investment
goals. Mutual funds offer several advantages:

Diversification: By investing in a variety of securities, mutual funds reduce risk.

Professional Management: Experienced fund managers handle investment

decisions.

Liquidity: Shares of most mutual funds can be easily bought and sold.

Affordability: Mutual funds allow investors to buy fractional shares of many

securities.

Bond Valuation: Bond valuation is the process of determining the fair price of a
bond. It involves calculating the present value of the bond's future cash flows,
which include periodic interest payments (coupons) and the principal repayment at
maturity. Key factors affecting bond valuation are:

Coupon Rate: The annual interest rate paid by the bond issuer.

Time to Maturity: The length of time until the bond matures.

Yield to Maturity (YTM): The total return an investor expects to earn on a bond.

Credit Risk: The risk that the issuer may default on the bond's payments.

Capital Market Instruments

Capital market instruments are financial securities traded in capital markets. They
are primarily used to raise long-term funds. The two main types of capital market
instruments are:

Equity Instruments: Represent ownership in a company. Examples include

common stock and preferred stock.

Debt Instruments: Represent a loan made by an investor to a borrower. Examples

include bonds, debentures, and commercial paper.

Investment Banking
 Investment banking is a specialized financial service that assists individuals,
corporations, and governments in raising capital. Investment banks provide
services such as:

Underwriting: Issuing and selling securities on behalf of clients.

Mergers and Acquisitions: Advising on and executing mergers, acquisitions, and

divestitures.

Private Equity: Investing in private companies with high growth potential.

Trading and Sales: Trading securities and providing investment research.

Securities Market

A securities market is a marketplace where securities, such as stocks and bonds,

are bought and sold. It facilitates the exchange of capital between investors and issuers.
The two main types of securities markets are:

Primary Market: Where new securities are issued for the first time.

Secondary Market: Where existing securities are traded among investors.

Securities markets play a crucial role in economic growth by providing a platform

for companies to raise capital and for investors to diversify their portfolios.
7. Discuss the impacts of dividends policies on firm performance.

Answer: Dividend policies have a significant impact on a firm’s performance,

influencing not only the company’s financial stability and growth prospects but
also its relationships with investors and its market perception. Here’s how
dividend policies can impact a firm’s performance:

1. Signaling Effect

• Positive Signals to Investors: Dividend policy decisions often signal a

company’s financial health to the market. Regular or increasing dividends suggest
that a company is financially stable, profitable, and has strong future prospects,
which can boost investor confidence and attract new shareholders.

• Negative Signals: Conversely, dividend cuts or suspensions may signal

financial distress or lack of growth opportunities. Investors may interpret such
actions as a sign that management expects lower future earnings, which can lead to
a drop in stock price and a loss of investor confidence.

2. Impact on Stock Price Volatility

• Price Stability: Firms with consistent dividend policies tend to have more
stable stock prices, as investors are drawn to the reliability of income. This
stability is attractive to risk-averse investors, such as retirees or institutions that
prefer steady income.

• Volatility Due to Dividend Changes: However, when a firm makes

unexpected changes to its dividend policy—especially reductions or suspensions—
it can lead to increased stock price volatility. Such changes can erode investor trust
and make the stock more volatile in the short term.

3. Impact on Capital Structure and Investment Opportunities

• Retention of Earnings for Growth: Firms that retain a larger portion of their
earnings instead of paying high dividends have more internal funds for
reinvestment, such as in R&D, acquisitions, or capital projects. This can drive
long-term growth, competitive advantage, and potentially higher stock value over
time.

• Debt Dependency: High dividend payouts may require companies to rely

more on external financing (such as debt) to fund growth projects, potentially
increasing financial leverage and interest obligations. This can lead to a higher risk
profile and, in some cases, lower profitability due to interest expenses.

4. Investor Base and Cost of Capital

• Attracting Income-Oriented Investors: A high dividend payout can attract a

specific group of investors, such as income-focused or dividend-focused investors,
who value regular income over capital gains. This can create a stable investor base,
which may reduce the stock’s volatility and provide a reliable source of capital.

• Lower Cost of Equity: Stable and predictable dividends may lower a firm’s
cost of equity by reducing perceived risk and increasing demand for its shares. A
reliable dividend policy can make the firm more attractive to a broader pool of
investors, enhancing liquidity and lowering the cost of raising capital.

5. Agency Costs and Management Efficiency

• Reduction of Agency Costs: Dividend payments can help reduce agency costs
(conflicts of interest between management and shareholders). When profits are
distributed as dividends rather than retained, management is less likely to invest in
unprofitable or inefficient projects, as they have fewer discretionary funds.

• Management Accountability: Regular dividends hold management

accountable to generate sustainable earnings. Managers of companies with
consistent dividend policies may be more focused on efficient operations and
prudent financial decisions to maintain the dividend stream.

6. Impact on Firm Value (According to Dividend Theories)

• Dividend Irrelevance Theory: According to Modigliani and Miller’s dividend

irrelevance theory, dividend policy has no impact on a firm’s value in perfect
markets. However, real-world factors such as taxes, transaction costs, and
imperfect information make dividend policy relevant to investors and, therefore,
firm value.

• Bird-in-the-Hand Theory: This theory suggests that investors may prefer the
certainty of dividends over potential future capital gains, which could increase
firm value as investors might be willing to pay a premium for stocks with regular
dividends.

• Tax Preference Theory: For certain investors, capital gains may be taxed at a
lower rate than dividends. Consequently, firms that pay lower dividends may
attract a particular investor base, potentially impacting the firm’s stock price and
cost of equity.

7. Influence on Cash Flow and Liquidity

• Impact on Cash Reserves: Paying high dividends can strain a company’s cash
reserves, especially during periods of lower revenue or economic downturns.
Companies with high dividend obligations may face liquidity constraints, which
could hinder their ability to fund operations or take advantage of strategic
opportunities.

• Flexibility in Financial Planning: Firms with lower dividend payout ratios

have greater flexibility to manage cash flow and respond to unforeseen expenses
 or investment opportunities. This flexibility can be advantageous for growth-
oriented firms or those in highly competitive industries.

Summary of Impacts on Firm Performance In summary, a company’s dividend

policy has far-reaching impacts on its performance, investor perception, and
financial strategy:

• A high dividend payout can attract income-focused investors, signal stability,

and lower stock volatility but may limit funds available for reinvestment,
potentially hindering growth.

• Low or no dividends allow for more reinvestment and may appeal to growth-
oriented investors but could increase stock price volatility and raise questions
about the company’s profitability.

A well-balanced dividend policy that aligns with a company’s growth strategy,

market conditions, and investor expectations can support long-term value creation
and sustainable performance.

8. Why do people view having too much debt as risky? If you were interested in
determining whether a company had too much debt, what measure would you use?

Answer: People view having too much debt as risky for several reasons, primarily
related to financial stability, cash flow management, and the potential for
insolvency. Here are the key factors that contribute to this perception:

Increased Financial Obligations: When individuals or companies take on debt, they

incur fixed financial obligations in the form of interest payments and principal
repayments. High levels of debt can strain cash flow, especially if income
fluctuates or declines. This can lead to difficulties in meeting these obligations,
increasing the risk of default.

Interest Rate Sensitivity: Debt often comes with variable interest rates that can
increase over time. If a company has significant debt and interest rates rise, its cost
of borrowing will also increase, further straining its finances. This sensitivity
makes high levels of debt particularly risky in volatile economic conditions.

Reduced Flexibility: Companies with excessive debt may have limited flexibility
to invest in growth opportunities or respond to market changes because a
significant portion of their cash flow is committed to servicing debt. This lack of
financial flexibility can hinder long-term strategic planning and operational agility.

Credit Ratings and Borrowing Costs: High levels of debt can negatively impact a
company’s credit rating, leading to higher borrowing costs in the future. A lower
credit rating signals increased risk to lenders and investors, which can result in
higher interest rates on new loans or bonds.

Risk of Bankruptcy: In extreme cases, excessive debt can lead to bankruptcy if an

entity cannot meet its obligations. The threat of bankruptcy not only affects the
entity itself but also impacts stakeholders such as employees, suppliers, and
shareholders.

Market Perception: Investors often perceive high levels of debt as a sign of

financial instability or poor management practices. This perception can lead to
decreased investor confidence and lower stock prices for publicly traded
companies.

Economic Downturns: During economic downturns or recessions, revenues may

decline while fixed debt obligations remain unchanged. Companies with high
leverage are more vulnerable during such periods because they may struggle to
maintain operations without sufficient cash flow.
 Measures to Determine Whether a Company Has Too Much Debt

To assess whether a company has too much debt, several financial ratios and
metrics can be used:

Debt-to-Equity Ratio (D/E): This ratio compares total liabilities (debt) to

shareholders’ equity (net worth). A higher D/E ratio indicates greater reliance on
borrowed funds relative to equity financing. Generally, a D/E ratio above 1
suggests that a company has more debt than equity; however, acceptable levels
vary by industry.

Debt-to-Equity Ratio=Total Liabilities

Shareholders’ Equity

Debt Ratio: This ratio measures total liabilities as a percentage of total assets and
provides insight into the proportion of assets financed by debt.

Debt Ratio=Total Liabilities

Total Assets

Interest Coverage Ratio: This ratio assesses how easily a company can pay interest
on outstanding debt by comparing earnings before interest and taxes (EBIT) to
interest expenses. A lower ratio indicates potential difficulty in meeting interest
payments.

Interest Coverage Ratio=EBIT

Interest Expense

Cash Flow-to-Debt Ratio: This metric evaluates how well a company’s operating
cash flow covers its total debt obligations over time.

Cash Flow-to-Debt Ratio=Operating Cash Flow

Total Debt

Leverage Ratio (or Total Debt/EBITDA): This ratio compares total debt to
earnings before interest, taxes, depreciation, and amortization (EBITDA),
providing insight into how many years it would take for the company to pay off its
debts using its current earnings.

Leverage Ratio=Total Debt

EBITDA

By analyzing these ratios collectively rather than in isolation, stakeholders can

gain a comprehensive understanding of a company’s leverage position and
determine whether it is at risk due to excessive indebtedness.

II. CASE PROBLEM – Read, analyze, and identify the financial management
problems of the following cases. Present an alternative solution of the problems
identified.

CASE #1: The FM Company suffered from cash flow issues caused by rapid growth,
undercapitalization, and lack of financial management expertise and control processes.
The FM Company accumulated excessive losses and struggled with liquidity issues that
threatened the company’s future viability. They had grown too rapidly and lacked
processes and working capital to fund their success. The FM Company needed financial
restructuring and a solid, experienced financial advisor if the company was to succeed.

Answer: Case Analysis: Financial Management Problems

FM Company is facing several financial management challenges that threaten its

sustainability and growth:

1. Cash Flow Issues: Rapid growth has led to cash flow problems, as the
company likely needs more liquidity to fund day-to-day operations and manage expenses.
Cash flow issues often indicate that revenue generation is not keeping up with the pace of
growth, or that there are inefficiencies in cash flow management, such as poor
receivables collection or inventory management.

2. Undercapitalization: The company is undercapitalized, meaning it does

not have enough capital to support its operations and growth. This often results from
insufficient financing, which can make it difficult for the company to invest in necessary
resources or cover operational expenses.

3. Lack of Financial Management Expertise and Control Processes: FM

Company lacks financial expertise and robust control processes, leading to inefficient
management of funds and increased financial risk. Without experienced financial
management, it is challenging to make informed decisions, perform accurate financial
forecasting, or maintain effective budgeting practices.

4. Excessive Losses: Accumulated losses indicate that expenses are

outpacing revenues, which could be due to high operational costs, low profit margins, or
mismanaged growth. These losses have likely weakened the company’s financial stability
and reduced available working capital.

5. Liquidity Issues: Due to the lack of working capital, FM Company is

struggling with liquidity, meaning it has limited cash to cover immediate obligations.
Poor liquidity can damage relationships with suppliers and creditors and can even lead to
insolvency if not addressed promptly.

Alternative Solutions to the Problems Identified

1. Implement Financial Restructuring

• Debt Restructuring: FM Company should consider restructuring its debt to reduce

interest payments or extend repayment terms. This could free up cash flow to address
immediate liquidity needs. The company could negotiate with creditors for lower rates,
convert some debt to equity, or seek partial debt forgiveness.

• Asset Restructuring: FM Company can identify and sell non-core or underutilized

assets to generate cash. Selling assets such as excess inventory, machinery, or real estate
could help raise working capital and alleviate liquidity constraints.

2. Seek External Financing to Address Undercapitalization

• Equity Financing: FM Company could raise capital by selling equity, either

through private investors or venture capitalists. Equity financing can provide the
necessary funds without adding to debt, though it does mean sharing ownership.

• Short-Term Credit Facilities: If immediate liquidity is needed, the company could

explore short-term credit options, such as a line of credit. This would provide quick
access to cash for urgent operational needs and help the company manage cash flow more
effectively.

3. Hire Experienced Financial Management Personnel

 • Recruit a Financial Advisor: Bringing in an experienced financial advisor or CFO
would provide the expertise needed for effective financial planning, budgeting, and cash
flow management. A skilled financial manager can identify inefficiencies, create a
sustainable financial plan, and set up processes to avoid future cash flow issues.

• Develop a Financial Control System: The company should implement control

processes for monitoring cash flow, expenses, and receivables. This would involve
establishing regular financial reporting, budgeting practices, and performance metrics to
help management make informed decisions.

4. Implement Cash Flow Management Practices

• Improve Receivables Collection: FM Company should streamline its receivables

collection process to improve cash inflow. This could include shortening payment terms,
offering early payment discounts, or implementing more rigorous credit policies for
customers.

• Optimize Inventory Levels: Excess inventory can tie up cash that could be used for
other purposes. The company should adopt a lean inventory management approach, such
as Just-In-Time (JIT), to reduce holding costs and improve cash flow.

• Negotiate Payment Terms with Suppliers: Extending payment terms with suppliers
could provide FM Company with additional time to pay, improving short-term liquidity.
Working closely with suppliers to negotiate favorable terms can also enhance the
company’s cash flow position.

5. Develop a Sustainable Growth Strategy

• Focus on Sustainable Growth: FM Company should adopt a more controlled

growth strategy. This might involve prioritizing high-margin products, scaling operations
gradually, and focusing on profitable customer segments.

• Set Up a Budgeting and Forecasting System: Regular budgeting and financial

forecasting can help the company anticipate cash flow needs, plan for future expenses,
and prevent over-expansion. These systems would enable management to better align
growth with financial resources.

Summary of Recommended Steps

To resolve FM Company’s financial issues and support sustainable growth, it’s

recommended to:

• Restructure existing debt and raise additional capital.

• Recruit experienced financial management personnel.

• Implement cash flow and financial control processes.

• Adopt cash flow optimization practices, such as improved receivables collection and
inventory management.

• Focus on sustainable, controlled growth with a clear budget and financial forecasting
system.

These steps will help FM Company address liquidity issues, manage rapid growth
effectively, and position itself for long-term financial health and stability.

CASE #2: The SV Company needed to raise its first institutional round to complete initial
animal studies. The co-founders completed a draft of a presentable Business Plan, but
early investor feedback indicated that the financial projections were unrealistic and
unacceptable. The financial presentation needed to clearly demonstrate the use of capital
and what additional capital requirements would be required upon successful completion
of the animal studies. The SV Company did not have the experience to undertake this
financial presentation and had limited resources to engage an experienced full-time CFO.

Answer: FM Company is facing several financial management challenges that threaten its
sustainability and growth:

1. Cash Flow Issues: Rapid growth has led to cash flow problems, as the
company likely needs more liquidity to fund day-to-day operations and manage expenses.
Cash flow issues often indicate that revenue generation is not keeping up with the pace of
growth, or that there are inefficiencies in cash flow management, such as poor
receivables collection or inventory management.

2. Undercapitalization: The company is undercapitalized, meaning it does

not have enough capital to support its operations and growth. This often results from
insufficient financing, which can make it difficult for the company to invest in necessary
resources or cover operational expenses.

3. Lack of Financial Management Expertise and Control Processes: FM

Company lacks financial expertise and robust control processes, leading to inefficient
management of funds and increased financial risk. Without experienced financial
management, it is challenging to make informed decisions, perform accurate financial
forecasting, or maintain effective budgeting practices.

4. Excessive Losses: Accumulated losses indicate that expenses are

outpacing revenues, which could be due to high operational costs, low profit margins, or
mismanaged growth. These losses have likely weakened the company’s financial stability
and reduced available working capital.

5. Liquidity Issues: Due to the lack of working capital, FM Company is

struggling with liquidity, meaning it has limited cash to cover immediate obligations.
Poor liquidity can damage relationships with suppliers and creditors and can even lead to
insolvency if not addressed promptly.

Alternative Solutions to the Problems Identified

1. Implement Financial Restructuring

• Debt Restructuring: FM Company should consider restructuring its debt to reduce

interest payments or extend repayment terms. This could free up cash flow to address
immediate liquidity needs. The company could negotiate with creditors for lower rates,
convert some debt to equity, or seek partial debt forgiveness.

• Asset Restructuring: FM Company can identify and sell non-core or underutilized

assets to generate cash. Selling assets such as excess inventory, machinery, or real estate
could help raise working capital and alleviate liquidity constraints.

2. Seek External Financing to Address Undercapitalization

• Equity Financing: FM Company could raise capital by selling equity, either

through private investors or venture capitalists. Equity financing can provide the
necessary funds without adding to debt, though it does mean sharing ownership.

• Short-Term Credit Facilities: If immediate liquidity is needed, the company could

explore short-term credit options, such as a line of credit. This would provide quick
access to cash for urgent operational needs and help the company manage cash flow more
effectively.

3. Hire Experienced Financial Management Personnel

• Recruit a Financial Advisor: Bringing in an experienced financial advisor or CFO

would provide the expertise needed for effective financial planning, budgeting, and cash
flow management. A skilled financial manager can identify inefficiencies, create a
sustainable financial plan, and set up processes to avoid future cash flow issues.

• Develop a Financial Control System: The company should implement control

processes for monitoring cash flow, expenses, and receivables. This would involve
establishing regular financial reporting, budgeting practices, and performance metrics to
help management make informed decisions.

4. Implement Cash Flow Management Practices

• Improve Receivables Collection: FM Company should streamline its receivables

collection process to improve cash inflow. This could include shortening payment terms,
offering early payment discounts, or implementing more rigorous credit policies for
customers.

• Optimize Inventory Levels: Excess inventory can tie up cash that could be used for
other purposes. The company should adopt a lean inventory management approach, such
as Just-In-Time (JIT), to reduce holding costs and improve cash flow.

• Negotiate Payment Terms with Suppliers: Extending payment terms with suppliers
could provide FM Company with additional time to pay, improving short-term liquidity.
Working closely with suppliers to negotiate favorable terms can also enhance the
company’s cash flow position.

5. Develop a Sustainable Growth Strategy

• Focus on Sustainable Growth: FM Company should adopt a more controlled

growth strategy. This might involve prioritizing high-margin products, scaling operations
gradually, and focusing on profitable customer segments.

• Set Up a Budgeting and Forecasting System: Regular budgeting and financial

forecasting can help the company anticipate cash flow needs, plan for future expenses,
and prevent over-expansion. These systems would enable management to better align
growth with financial resources.

Summary of Recommended Steps

To resolve FM Company’s financial issues and support sustainable growth, it’s

recommended to:

• Restructure existing debt and raise additional capital.

• Recruit experienced financial management personnel.

• Implement cash flow and financial control processes.

• Adopt cash flow optimization practices, such as improved receivables collection and
inventory management.

• Focus on sustainable, controlled growth with a clear budget and financial forecasting
system.

These steps will help FM Company address liquidity issues, manage rapid growth
effectively, and position itself for long-term financial health and stability.

Submitted by: MARYSTEL B. CASIANO

Note:

a. email your answers to josephrefugio@svc.edu.ph

b. Deadline: November 3, 2024 until 5:30 PM

Joseph G. Refugio, DM-EM, DBE, LPT

Professor

Note: Business Case Analysis requirement deadline, November 30, 2024