Sample 3 Credit Answer

ASSIGNMENT - MANAGING & ACCOUNTING for FINANCIAL RESOURCES
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CONTENTS
Executive Summary ………………………………………………………………… 3
1.0 Introduction …………………………………………………………………. 4
2.0 Definition of Terms …………………………………………………………. 6
3.0 Background of VAW………………………………………………………… 12
4.0 Current VAW Financing Costs Control Methods …………………………... 15
5.0 Conclusion..……………………....………………………………..………… 31
6.0 References …………………………...………………….………………........33
Prepared by Chim Weng Chung (OCKL: PJ102213KL) Due Date: 13/12/09 Page 1 of 28
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EXECUTIVE SUMMARY
Before commencing with the company, say something about financial resources –
what are they, why are they important for an organisation, what would happen if there are
insufficient resources; what are control measures on financial resources and their
significance.
VAW is a normal company like other small private companies in Malaysia. During
business start-up, its financial resources were merely derived from shareholders paid-up
capital and managed by a handful of workers together with their directors. Hence it would be
reasonable to deduce that VAW is a local so-called ‘china-man’ company. Yet the company
managed to expand its business locally and has over 50 staff as of today.
In this paper, VAW is our subject to be evaluated in financial management

perspectives. We assessed (you don’t assess the Co.- only the controls and how effective they
were) VAW on its financial resources management in term of its short-term and long-term
financing. Each assessment method has been clarified briefly and the measures taken by
VAW of its financial resources control has been discussed in detail. All the methods that
VAW embraced are similar to that adopted by multinational companies. We have therefore
found a positive correlation between successful MNC companies and good financial
management in our paper.
Having highlighted the financial resources, controls and financing methods, we

articulated that VAW is implementing aggressive financing strategy to finance its seasonal
needs with short-term funds and its permanent needs with long-term funds. It’s proven that
the company is running at the right track and good management in view of its positive annual
revenue and business expansion.
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1. INTRODUCTION
In a simple way, a financial resource is defined as the availability of money in the form of
cash, securities, creditors, loan facilities, and so on possessed by an organization.
However, most of laymen think that the financial resources are cash on hand which come
from sales and can be used for purchasing tangible items. Mainly financial resources are
sourced from internal sources, that is. personal saving, retained earnings, working capital
and sale of asset, and external sources, via hire and purchase, leasing, debenture and so
on.
Daniels et al. (1979) define control as `the planning, implementation, evaluation and
correction of performance in order to achieve organizational objectives'. Shapiro (1992)
recognizes three elements of the control process: setting objectives, measuring results,
and comparing results with objectives. He also recognizes the objectives of control as
`communication, evaluation and motivation'. Martinez and Jarillo (1989) point out that
the managerial challenge facing MNCs is how to co-ordinate the increasing number of
dispersed and yet interdependent international activities.
Why is financial resources control important to an organization? For many businesses,

the issue about how to control and manage financial resources for starting up,
development and expansion can be crucial for the success of the business. It is important,
therefore, that we understand the various financial resources open to a business and are
able to assess and control how appropriate these resources are in relation to the needs of
the business. In addition, by well-controlling and managing the financial resource,
undoubtedly the shareholders’ wealth will be increased. Apparently the consequence of
not controlling and managing financial resource properly will indeed affect the whole
organization performance. For an example, the company would not be able to further
invest and develop new products for sales and consequently the income will be generated.
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2. DEFINITION OF TERMS
5S System
The 5S system is a tool, or system, that supports a philosophy of operating. The
philosophy that this system supports is one of discipline, efficiency, and attention to
detail. The 5S are (1) Seiri (Sorting), (2) Seiton (Set in Order), (3) Seiso (Sweeping), (4)
Seiketsu (Standardizing) and (5) Shitsuke (Sustaining the discipline)
Accruals
Is defined liabilities for services received for which payment has yet to be made
Account payable (Creditor)

Money owing to suppliers for goods and services purchased but not yet paid for. Also it’s
called creditor in UK
Account receivable (Debtor)

Is defined the extension of credit by the firm to its customers. Also it’s called debtor in
UK
Bank Lending Rate (BLR)

Base Lending Rate (BLR) is a minimum interest rate calculated by financial institutions
based on a formula which takes into account the institutions cost of funds and other
administrative costs. The BLR is almost always the same amongst major banks.
Adjustments to the BLR are made by banks at the almost same time; although, the BLR
does not adjust on any regular basis. The BLR is usually adjusted at the time in
correlation to the adjustments of the Overnight Policy Rate (OPR) which is determined
by Bank Negara Malaysia (BNM) during Monetary Policy Meeting. Banks in some
countries use the name "Prime Rate" or "Prime Lending Rate" to refer to their Base
Lending Rate.
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Benchmark
Benchmarking can be simply defined as a continuous process to find and implement best
practices that will lead to superior performance. As the definition implies, benchmarking
is a process that will make a company’s operations lean, and improve quality and
productivity
Bonds
Is defined as written and signed promise to pay a certain sum of money on a certain date,
or on fulfilment of a specified condition. All documented contracts and loan agreements
are bonds.
Budget
Is defined as financial plan and a mean of control
Capital Expenditure (CAPEX)

Is defined amount spent to acquire or upgrade productive assets (such as buildings,
machinery and equipment, vehicles) to increase the capacity or efficiency of a firm for
more than one accounting period. Also called capital spending and often referred to as
capital investments
Carrying costs
Is defined the variable costs per unit of holding an item in inventory for a specified time
period
Cash cycle
Is defined the amount of time elapsed from the point when an outlay is made to purchase
raw materials to the point when cash is collected from the sale of the finished product
using the raw material
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Cash turnover
The number of times per year the firm’s cash is turned into a marketable product and then
back into cash
Credit analysis
The evaluation of a credit applicant to estimate creditworthiness and the maximum
amount of credit to extend
Credit Period
The number of days until payment in full is required.
Credit policy
Guideline for determining whether to extend credit to a customer and how much credit to
extend
Credit standard
The minimum criteria for the extension of credit to a customer
Current assets
Is defined short term sources of finance such as stocks, debtors and cash
Current liabilities
Is defined short term requirements for cash including trade creditors, expense creditors,
tax owing, dividends owing - the amount of money the business owes to other
people/groups/businesses at any one time that needs to be repaid within the next month or
so.
Debentures
Is defined a loan secured on assets which is usually issued at a fixed rate of interest and
repayable on a specific date.
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Dependent-demand (or derived-demand) items
Is defined as those components that are assembled to become part of some parent item or
in some similar way become part of a set of components.
Economic Order Quantity (EOQ) model

Is defined a technique for determining the optimal order quantity of an inventory item,
based on the trade-off between various operating and financial inventory costs.
Equity
Is also known as shareholders’ funds, or net worth, it is the sum of issued share capital
and reserves.
External sources
Means raising money from outside the firm. In many cases this will mean turning to the
banks, but it may also be that the firm tries to issue more shares on the stock market or
perhaps sells debentures to raise money.
Internal sources
Refers to money they can raise from within the firm. This may include profit, or perhaps
better management of existing resources.
Internal Rate of Return (IRR)

Is defined the discount rate that brings the present value of the future net cash flows to
zero.
Inventory
Is defined as goods on hand. Current asset that permits the production-sale process to
operate with a minimum of disturbance.
Just-In-Time (JIT)
Inventory strategy that strives to improve a business's return on investment by reducing
in-process inventory and associated carrying costs.
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Kanban
Label or signboard, is used as a communication tool in JIT system
Letter of Credit (LOC)

An irrevocable payment undertaking drawn up by the customer’s bank that binds the
bank to pay a fixed sum of money to another party on fulfillment of certain criteria (the
delivery of goods).
Line of credit
Is defined the maximum amount a customer can owe the firm at any time
Order costs
The fixed clerical costs of placing and receiving an inventory order
Marginal costing
Is defined a system of costing used for decision-making which is based on the analysis of
costs into fixed and variable categories. The marginal cost of an additional unit of output
is the cost of the additional inputs needed to produce that output. More formally, the
marginal cost is the derivative of total production costs with respect to the level of output.
Net Present Value (NPV)

Is the excess of the present value of cash inflows generated by the project over the
amount of the initial investment
Payback Period
Is defined the length of time required to recover the amount of initial investment.
Present Value
Is defined a value of future cash flows is computed using the so-called cost of capital (or
minimum required rate of return) as the discount rate.
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Retained Profit
Profits/Earning/Revenue generated by a firm that are not distributed to stockholders
(shareholders) as dividends but are either reinvested in the business or kept as a reserve
for specific objectives (such as to pay off a debt or purchase a capital asset).
Reorder Point
The point at which to reorder inventory, expressed equationally as: lead time in days ×
daily usage
Telegraphic Transfer or Telex Transfer (TT),

An electronic means of transferring funds overseas.
Total Productive Maintenance (TPM)

TPM (Total Productive Maintenance) is a maintenance philosophy designed to integrate
equipment maintenance into the manufacturing process. The goal of any TPM program is
to eliminate losses tied to equipment maintenance or, in other words, keep equipment
producing only good product, as fast as possible with no unplanned downtime.
Weighted Average Cost of Capital (WACC)

Cost of acquiring debt and/or equity capital, computed on the basis of interest rate,
income tax rate, and return on equity goal.
Working capital
Is defined as the difference between current assets minus current liabilities
Work-In-Process (WIP) parts

The set at large of unfinished items for products in a production process
Too many terms for definition – ensure that all have been actually used and relevant
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3. BACKGROUND OF VAW
VAW Sdn. Bhd. is a Malaysia home-grown privated limited company which is

situated in Ara Damansara, Petaling Jaya, Selangor Darul Ehsan. The company was
incorporated on 09 June 2003 with a paid-up capital RM 300,000 from its 2 directors’
personal savings. As of 2009, the company has 56 permanent employees. Its main
business activities are:-
• Electronic product design contractor for automotive products and home appliance
• Sub-assembly electronic products manufacturing contractor for overseas and local
customers.
Its products profiles are mainly car power window switches, car clocks, house air
cleaners. Most of its customers are from overseas, e.g. Johnson Control and Unico and
locally it does supply products to Proton and Perodua suppliers, e.g. E.P. Polymers,
Proreka and Focus. In order to manage supply chain well, most of the raw materials and
child parts are supplied from local companies and China.
Based on last year 2008 financial performance, it successfully achieved RM 2.1
millions sales turnover with gross profit RM 541,160 though having global economic
downturn. Most of its sales are derived from electronic products (78%) and the remaining
from design consultancy services (22%).
3.0 Financial Resources

In general, VAW’s finance resources can be categorized into 2 main key sources.
They are as follows:-
I. The Internal sources:-

1) Retained profit
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These profits are mainly derived from selling products and design
consultancy service. This source is mainly used as capital expenditure
(CAPEX). Also VAW uses it for paying off some debts.
2) Working capital
VAW uses this source to pay for the everyday trading activities carried out
by the business - stationery needs, staff salaries and wages, rent, energy
bills, payments for supplies and so on.
3) Benefits gained from more effective management of VAW working

capital
As a result of VAW effective management in implementing lean
manufacturing system, e.g. 5’S system, there is indeed cost reduction and
profit maximization in VAW. This topic will be discussed in Subtopic 4.7:
Cost Management on how VAW approaching effective cost management in
its operation.
II. External sources:-

1) Equity
This source is derived from VAW directors during initial company set-up and
the directors receive dividends from the company in return. Of course, the
financing term of it is unlimited, i.e. for life compared to loan.
2) Hire Purchase
All VAW transportation vehicles, i.e. car, one-tonne-load lorry and forklift
are purchased under hire purchase agreement. Usually the agreement period is
5 years and after that, VAW only able to possess the vehicles. It’s a secured
loan to VAW and there is interest charge on it. In addition, VAW has to
allocate some budgets for other payments associated with owing the vehicles,
such as insurance, road tax and expenses for periodical maintenance.
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3) Leasing
Normally VAW has a lease agreement with machine makers/suppliers on
assembly and functional tester machines e.g. photocopy machines and hot-
melt glue robotic arm machine and hot-plate welding machines from Branson
(M) Sdn. Bhd. The leasing agreement period usually will be in 10 years and it
is a operating lease. In addition, current VAW factory is leased from one
private owner.
3) Overdraft
VAW overdraft financing is provided by SME Bank, Malaysia and it enables
VAW business to obtain short-term funding. The interest rate is charged
on the amount overdrawn - at a rate that is 1% above the Bank Lending
Rate (BLR). The bank also charges VAW for an overdraft facility fee
4) Line of credit from suppliers

Line of credit from suppliers is one of the major sources of unsecured short-
term financing for VAW business. They result from transactions in which
merchandise or raw parts are purchased but no formal note is signed
evidencing VAW’s liability to the suppliers. We will discuss this topic in
details in subsequent topic, Subtopic 4.1: Credit Control Policy.
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4. CURRENT VAW FINANCING COST CONTROL METHODS
In general, VAW controls and manages its financial resources in term of short
terms and long-term financing costs. Following Subtopic 4.1 to 4.5, we will discuss how
VAW controls its short-term financing costs from internal and external finance sources.
This short-term financing costs are main from working capital. Refer to Figure 1 and 2
for better understanding of working capital. In following Subtopic 4.6 – Capital Investment
Policy, we will discuss how VAW plans, controls and manages its retained profit and long-
term sources, i.e. hire purchase and leasing for investment purposes. In Subtopic 4.7, we will
discuss VAW cost management on how it control its costs in production and monitor and
review products costs and quotations in more accurate ways.
Figure 1: Working Capital cycle. Source: Tennent (2008), pg 251
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Figure 2: Working Capital Management. Source: Tennent (2008), pg 252
4.1 Credit Policy

VAW needs to extend credits in order to keep current customers and attract new
ones. Therefore it has established credit standards to use in making decisions
whether to extend credit to customer, and how much credit to extend. Having a
good credit policy, VAW can manage to control its financial resources and
increase shareholders’ wealth.
4.1.1 Account Receivable

For average manufacturer, account receivable accounts for over 37 percent of
current assets and nearly 16 percent of total assets. Generally, the firm’s
financial manager directly controls accounts receivable through involvement
in the establishment and management if credit policy, credit terms, and
collection policy (Lawrence, 1998)
4.1.1.1 Credit Standards

In establishing credit standards, VAW Credit division, Finance dept has
considered three major variables, i.e. (1) sales volume, (2) the investment
in account receivable, and (3) bad debt expenses.
4.1.1.2 Determine Key Variable Values for Credit Standard Decision

Making
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Prior to making decision whether VAW should relax its credit standards, it
has to determine key variable values and then compare profit contribution
from sales to the sum of the cost of the marginal investment in accounts
receivable and the cost of marginal bad debts.
In determining the key variable values, VAW has identified
.a Additional profit contribution from sales expected to result from the
relaxation of credit standards.
.b Cost of the marginal investment in accounts receivable
.c Cost of marginal bad debts
Finally step to decide credit standard, VAW compares the additional profit
contribution from sales to the sum of the cost of the marginal investment
in accounts receivable and the cost of marginal bad debts. If there is
positive in value, VAW will opt for the implementation of proposed plan
(credit standard relaxation). VAW is practicing this credit standard
confirmation whenever there is request for credit standard relaxation from
its customers or contemplating a relaxation of credit standards.
4.1.1.3 Credit Analysis

Once VAW has established its credit standards, it will carry out credit
analysis on its potential customers by obtaining and analyzing relevant
credit information in order to determine creditworthiness and the
maximum amount of credit the customer is capable of supporting. Once
this is done, VAW will establish a line of credit.
In evaluating the creditworthiness of VAW’s customer, its credit division
performs 2 basic steps, i.e. (1) obtaining credit information and (2)
analyzing the information.
a. Obtaining Credit Information
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Financial Statements. For any local small customers who desiring
credit terms, VAW typically begin the evaluation process by requiring
the applicant customer to fill out various forms requesting financial
and credit information and references. One of the documents is
Financial Statements for past few years which enable VAW to analyze
the company’s liquidity, activity, debt, and profitability positions. For
public-listed customers, VAW will obtain the financial statement from
their annual prospectus.
Banking Checking. For further checking the customer applicant,

VAW may obtain credit information from the customer applicant’s
bank if there is any doubts on their financial statements
b. Analyzing Credit Information

After getting the financial statements and accounts payable ledger of
customer applicant, VAW shall use it to calculate its “average
payment period”. This value can then be compared to the credit terms
currently extended by VAW.
For customers requesting large amounts of credit or lines of credits,
VAW will have a thorough ratio analysis of the company’s liquidity,
activity, debt, and profitability using the relevant financial statements.
Undoubtedly, VAW also shall evaluate the customer applicant
company in term of management characters and references from other
suppliers. At last, VAW management as a credit review committee
will make the final decision as to whether to extend credit to the
customer applicant, and possibly what amount of credit to extend.
4.1.2 Account Payable

Likewise, VAW also requires extended credit terms from suppliers for
better credit control. VAW has good credit rating in its suppliers as it has
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been a good paymaster for 6 conservative years without payment failure,
i.e. complete payment within credit period (net 30 days) since the
company been incorporated.
a) Credit Term
Taking the opportunity of having good credit rating and sales
increased double in 2007, VAW requested its suppliers to extend
the credit period from net 30 days to 60 days. Having stretching
accounts payable, VAW can reduce the cost of forgoing a cash
discount without damaging its credit rating.
b) Cash Discount with Credit Term Analysis

After extended credit term to net 60 days, one of the suppliers,
TTC Sdn. Bhd. who supplies all wires components to VAW,
offered credit terms of 4/10 net 60 end of month (EOM). It means
the cash discount is 1 percent, the cash discount period is 10 days
and 55 days of credit terms.
Based the offer given, VAW has done an analysis/calculation on it
as follows-
4% 360
Cost of forgoing cash discount = ×
100% − 4% 50
= 30.0%
In comparing to cost of borrowing money from the bank (30.0%
percent as opposed to 13 percent), VAW took the cash discount
from TTC.
4.2 Collection Control

VAW is employing few collection basic techniques in order to reduce bad debts.
a. Letter
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After an account receivable becomes overdue 10 days, VAW normally sends
polite letter reminding the customer of its obligation. If the account is not
paid within 10 days after the letter has been sent, a second, more demanding
letter is sent. Collection letters are the first step in VAW collection process
for overdue accounts.
b. Telephone Calls
If letter prove unsuccessful, VAW sales manager will call the customer to
personally request immediate payment.
c. Personal Visits
For regular customers, VAW sales manager will pay a visit to confront the
customer. So far VAW’s customers are still able to pay their debts though
sometimes their accounts are overdue. There is no further actions been taken
for collection like legal action.
4.3 Inventory Control Policy

For average manufacturer, inventory accounts for over 42 percent of current
assets and nearly 18 percent of total assets (Lawrence, 1998). VAW aware that
the higher inventory levels result in increased costs from storage, insurance,
spoilage, and interest on borrowed funds needed to finance inventory acquisition.
Thus VAW uses 3 basic techniques for managing inventory efficiently. They are
(1) the basic economic order quantity (EOQ), (2) the reorder points and (3) Just-
In-Time (JIT) strategy. VAW purchasing department with finance department’s
assistance uses Technique (1) and (2) for ordering raw material (child parts and
sub-assembly parts) from its suppliers. Meanwhile, VAW uses JIT to reduce in-
process inventory in production shop floor.
4.3.1 The Basic Economic Order Quantity (EOQ)
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VAW uses this technique to find the optimal order quantity that minimizes
the total cost which includes order cost and carrying cost.
4.3.2 The Reorder Points

Once VAW has calculated its economic order quantity, it shall determine
when to place orders. A reorder points is required that considers the lead
time needed to place and receive orders.
4.3.3 Just-In-Time (JIT) system for Work-In-Progress (WIP) parts

As VAW is an OEM electronic product manufacturer, it deals with
dependent-demand inventories. With implementation of JIT system for
WIP, parts and materials arrive just in time to be used in production. The
primary goal of JIT is to reduce WIP inventories to insignificant or zero
levels. Below are some of the procedures that VAW uses for reducing
WIP parts in production
a. Kanban Pull procedures

In VAW, the kanban system implementation can be seen obviously in
suppliers’ supplied parts in production shop floor. VAW uses a "three-bin
system" for the supplied parts (where there is no in-house manufacturing)
— one bin on the factory floor (demand point), one bin in the factory store
and one bin at the suppliers' store. The bins usually have a removable card
that contains the product details and other relevant information — the
kanban card. When the bin on the factory floor becomes empty, i.e, there
is demand for parts, the empty bin and kanban cards are returned to the
factory store. The factory store then replaces the bin on the factory floor
with a full bin, which also contains a kanban card. The factory store then
contacts the supplier’s store and returns the now empty bin with its kanban
card. The supplier's inbound product bin with its kanban card is then
delivered into the factory store completing the final step to the system.
Thus the process will never run out of product and could be described as a
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loop, providing the exact amount required, with only one spare so there
will never be an issue of over-supply. This 'spare' bin allows for the
uncertainty in supply, use and transport that are inherent in the system.
b. Design Flow Process

In reducing WIP part in factory shop floor, VAW has re-designed its
production process flow such as relocate child parts bins and scrap bins near
to working stations (within 1 meter distance) so that the factory workers able
to access the child parts to reduce process time cycle of each working stations
and increase WIP consumption rate.
4.4 Cash Management

Having good credit and inventory controls, VAW’s operating cash can be
minimized by minimizing the cash cycle and thereby maximize cash turnover.
VAW has at its disposal a variety of cash management techniques that can
provide additional savings. These techniques are aimed at minimizing the firm’s
cash requirements by taking advantage of certain imperfections in the collection
and payment systems. These techniques procedures take advantage of the “float”
existing in the collection and payment systems.
4.4.1 Mail Float

For disbursement payments to suppliers, VAW usually posts its payment cheques
them especially payments exceed RM20,000.00. As a result, the payments are
“successfully” deferred for another 3 days. In the other hand, VAW sales people
will collect payments from customers directly in order to avoid similar payment
delay and at the same time, VAW can show their sincerity and commitment on their
business relationship.
4.4.2. Cheque Clearing Float
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All the payments made by VAW to suppliers are in cheque mode as the clearing
cheque will take 2 days (max.). Thus another 2 days payment delay for VAW. On
the other hand, usually VAW requests for cash on delivery for small quantity of
product which doesn’t exceed RM20,000.00 per sales order. It is to ensure the cash
cycle able to be reduced.
4.4.3 Bank Overdraft System

Once awhile, VAW’s account is insufficient and however it been covered by bank
overdraft system. Having cheque overdraft system, VAW is able to cover all its
cheques to suppliers. This happens in VAW when its business needs to fund a
temporary overdraft during the year due to the timing of sales receipts compared
with supplier payments.
4.4.4 Letter of Credit (LOC) – Guaranteeing Payment

Knowing businesses trade across country borders the ability to collect cash
becomes more difficult. There are potentially two legal systems operating and
pursuing the customer can be expensive. Therefore VAW requests its overseas
customers to make payment in Letter Of Credit (LOC) as a minimum
requirement, after Telegraphic Transfer (TT) payment.
4.5 Accruals Reduction
4.5.1 Salaries & Wages

In view of accruals is apart of current liabilities of VAW, it is indeed its
intention to reduce accruals. As VAW’s sales increase, its accruals increase as
wages and taxes rise due to greater labour requirements and increased taxed
on VAW’s increased earnings. Since taxes are payments to the government,
their accrual cannot be manipulated by VAW. However, the accrual of wages
can be manipulated to some extent. This is accomplished by delaying
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payment of wages, i.e. payment made on 07 of every month, thereby
receiving an interest-free loan from its employees who are paid sometime
after they have performed the work. However this late payment is rarely
happened now in VAW after employees expressed their dissatisfaction to the
company in February 2008.
In addition, VAW is appointing contract worker agency, i.e. Lonson
Enterprise (M) Sdn. Bhd. to provide general contract production workers
during sales increase. With appointing Lonson, VAW saves certain amount of
money on paying the workers’ EPF and bonus. Further, VAW doesn’t have
‘human resource holding cost’ when the sales reduce.
4.5.2 Utilities
In certain period of time, especially VAW has financial constraint for
supporting sudden sales increase, its telephone and electricity accounts are
always issued in arrears. Further there is no interest charged for it.
4.5.3 Short-Term Refinancing Debt (For interest reduction)

Whenever one of the VAW debts dropped to RM 100,000, VAW directors
will refinance the debts with SME Bank which have lower interest rate
after negotiating with current bank debtor. This is because SME Bank is a
bank that fully support and meet the unique needs of small and medium
enterprises in Malaysia. As a result, VAW interests have been reduced.
4.6 Capital Investment Policy
Prior to any long-term loan borrowing, project launching or fixed asset

purchase, VAW will have to go through its capital investment policy and
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procedures which done by its Finance Dept with Engineering and Production
Dept’s assistance. This is to ensure its financial resources are well-managed and
controlled in long run.
Generally, VAW capital investment policy can be divided into two main
processes. They are capital budget planning and capital investment decision. We
will discuss it in subtopic 4.6.1 and 4.6.2 for better understanding.
4.6.1 Capital Budget Planning

In any company, the budget helps management to allocate its financial
resource, and likewise VAW does have its budget planning annually. In
the budgeting process, VAW management decides how much to spend on
which resources. The method of preparing budget by VAW is consultative
budgeting with incremental approach. There are two kinds of operating
budgets in VAW. They are:-
4.6.2 Capital Investment Decision

In order to justify its budget allocation on any investment plan, VAW
managements are required to analyze and appraise each of the financial
resources investments.
Basically, techniques for investment quantitative appraisal used by VAW

are as follows:-
1. Net Present Value (NPV)
VAW uses this method to show the profit of an investment after
funding costs have been deducted. Also, if VAW was analyzing more
than one investment opportunity with the NPV method, VAW would
choose the one (or the ones) with the highest net present value. In
calculating NPV, VAW chooses Weighted Average Cost of Capital
(WACC) as discount rate as this is a longer-term rate that takes into
account the mix of funding sources. For VAW, its WACC of year
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2009 is 11%. VAW will select investment that can show positive NPV
and turn down any proposal that produce negative NPV.
2. Internal Rate of Return (IRR)

In this method, VAW calculate his IRR of an investment plan and
compare it to its hurdle rate (or target rate). If the internal rate of return
exceeds your hurdle rate, VAW will say “Yes” to the investment. For
simplicity, VAW uses its WACC as hurdle rate in its calculation.
3. Payback Period
VAW uses this method for short-term investment, meaning those of a
year or less, where VAW can measure the payback period in months.
Also, VAW might calculate the payback period for longer-term
investments as extra information to use along with net present value
and internal rate of return.
Besides considering quantitative values by using above techniques, VAW will

consider qualitative factors which may have impact of the decision. They are:-
• Employees
• Other parts of the business
• The environment
• Future opportunities
• The image of the company
4.6.3 Lease versus Purchase Decision

The lease-versus-purchase decision is one that commonly confronts VAW
contemplating the acquisition of new fixed assets using its capital. Even if VAW
has the liquid resources with which to purchase the assets, the use of these funds
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_
is viewed as equivalent to borrowing. Therefore VAW need to compare the
leasing and purchasing alternatives.
In VAW, lease versus purchase decisions can be made by first finding the present
value of the after-tax cash outflows associated with both leasing and purchasing,
and then selecting the alternative with the lower present value. VAW Finance
manager will come out the comparison whenever there is a need to acquire new
plastic hot-plate welding machine from Branson. The company does provide lease
agreement to VAW since VAW is their regular customer.
Most of time in acquiring production machines, VAW will opt for lease after
considering lower cost than purchasing and liquidity increase by converting an
existing asset into cash, which can then be used as working capital.
5. CONCLUSION
In a competitive marketplace many business companies struggle to earn a satisfactory

level of profitability. Yet, without appropriate financial resources control, companies will
not survive over time. One only has to witness the number of companies (small and large
alike) that have filed for bankruptcy protection and closed their doors to realize that
business ownership does not automatically assure financial success.
There is no question that many business owners and managers have the need to acquire
and improve financial management professionalism. It is proven in VAW that its
management successfully managed its financial resources by looking at their positive
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_
financial performance. Nevertheless, VAW has high potential to further manage its
financial resources to increase its shareholders’ wealth.
In view of its current competency in new product design and development, VAW could
seek Research & Development (R&D) funds from the government for one of its
innovative products, the bio-green air cleaner which has been patented by VAW. The
future of a company rests on its ability (R&D) to develop products and services to keep
up with or stay ahead of the competition. Also known as application development, this
would be essential to keep and increase its customer base. Being there first with new
ideas, VAW could charge a premium price, and if costs could be contained this could
lead to better profits. Equally, R&D can lead to reduced production costs, which also
would improves profits. A patent with R&D is indeed one of the intangible non-current
assets in a company.
While juggling its finance sources and expenses to maximize its shareholders’ wealth,
VAW should increase financial resources by seeking more long-term sources, e.g. bonds
and debentures. VAW has a good credit rating too and has high potential to expand its
business. It would be wise to seek long-term funds for its future investment plans.
References/Bibliography
1. Books – not alphabetically arranged!
Carreira, Bill (2004), Lean Manufacturing That Works : Powerful Tools for Dramatically
Reducing Waste and Maximizing Profits. Saranac Lake, NY, USA: AMACOM
Bragg, Steven M. (1988), Inventory Accounting: A Comprehensive Guide, by John Wiley

& Sons, Inc., Hoboken, New Jersey
Bhimani, Alnoor. (2006), The Contemporary Issues in Management Accounting, Oxford

University Press, UK.
_______________________________________________________________________
_
Daniels, J. D., Ogram, E. W. and Radebaugh, L. H. (1979) International Business:

Environment and Operations, 2nd edn (Reading, Mass.: Addison-Wesley).
Gitman, Lawrence J. (1998), Principles of Managerial Finance, 5th ed., HarperCollins

Publishers.
Jae K. Shim & Joel G. Siegel (2007), Schaum’s Outline of Financial Management, 3rd ed.,
McGraw-Hill Companies, Inc.
Moosa, Imad. A. (2002), Foreign Direct Investment: Theory, Evidence and Practice.
New York, NY, USA: Palgrave Macmillan.
Mott, Graham (2005), Accounting for Non-Accountants (6th Edition).London, GBR:

Kogan Page, Limited.
Shapiro, A. (1992) Multinational Financial Management, 4th edn (Newton, Mass.: Allyn
and Bacon).
Tennent, John (2008), Guide to Financial Management, by GBR: Profile Books

Limited/The Economist
2. Electronic and Print Media
http://www.bized.co.uk/learn/accounting/financial/sources/index.htm, accessed 29
November 2009
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_

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ASSIGNMENT - MANAGING & ACCOUNTING for FINANCIAL RESOURCES

Executive Summary ………………………………………………………………… 3

1.0 Introduction …………………………………………………………………. 4

2.0 Definition of Terms …………………………………………………………. 6

3.0 Background of VAW………………………………………………………… 12

4.0 Current VAW Financing Costs Control Methods …………………………... 15

6.0 References …………………………...………………….………………........33

In this paper, VAW is our subject to be evaluated in financial management

Having highlighted the financial resources, controls and financing methods, we

Why is financial resources control important to an organization? For many businesses,

Account payable (Creditor)

Account receivable (Debtor)

Bank Lending Rate (BLR)

Capital Expenditure (CAPEX)

Economic Order Quantity (EOQ) model

Internal Rate of Return (IRR)

Letter of Credit (LOC)

Net Present Value (NPV)

Telegraphic Transfer or Telex Transfer (TT),

Total Productive Maintenance (TPM)

Weighted Average Cost of Capital (WACC)

Work-In-Process (WIP) parts

VAW Sdn. Bhd. is a Malaysia home-grown privated limited company which is

3.0 Financial Resources

I. The Internal sources:-

3) Benefits gained from more effective management of VAW working

II. External sources:-

4) Line of credit from suppliers

4. CURRENT VAW FINANCING COST CONTROL METHODS

Figure 1: Working Capital cycle. Source: Tennent (2008), pg 251

Figure 2: Working Capital Management. Source: Tennent (2008), pg 252

4.1 Credit Policy

4.1.1 Account Receivable

4.1.1.1 Credit Standards

4.1.1.2 Determine Key Variable Values for Credit Standard Decision

4.1.1.3 Credit Analysis

a. Obtaining Credit Information

Banking Checking. For further checking the customer applicant,

b. Analyzing Credit Information

4.1.2 Account Payable

b) Cash Discount with Credit Term Analysis

4.2 Collection Control

4.3 Inventory Control Policy

4.3.1 The Basic Economic Order Quantity (EOQ)

4.3.2 The Reorder Points

4.3.3 Just-In-Time (JIT) system for Work-In-Progress (WIP) parts

a. Kanban Pull procedures

b. Design Flow Process

4.4 Cash Management

4.4.1 Mail Float

4.4.2. Cheque Clearing Float

4.4.3 Bank Overdraft System

4.4.4 Letter of Credit (LOC) – Guaranteeing Payment

4.5 Accruals Reduction

4.5.1 Salaries & Wages

4.5.3 Short-Term Refinancing Debt (For interest reduction)

4.6 Capital Investment Policy

Prior to any long-term loan borrowing, project launching or fixed asset

4.6.1 Capital Budget Planning

4.6.2 Capital Investment Decision

Basically, techniques for investment quantitative appraisal used by VAW

2. Internal Rate of Return (IRR)