FMA ASSIGNMENT

FMA Assignment

FMA Assignment

Introduction

Historically, financial controllers have been charged with managing the financial accounting and reporting functions of their institutions. Consequently, most of their time has been devoted to general stewardship duties, preparing reports to regulators and boards of directors, and containing costs. However, new technologies, accounting and regulatory changes, and increased customer sophistication have combined to create a fiercely competitive industry and to change the controller's role. (Catanach, 1999)

For any securities market or stock exchange to be successful it must be possible for investors to easily liquidate or cash in their investments, otherwise they would demand a premium for tying up their capital, or avoid investing in the stock market altogether. Clearly such a situation would make it extremely difficult for companies to raise essential capital.

Financial practitioners often use simple rules of thumb to set goals for financial success. For example, they recommend that more risk-averse investors hold a higher ratio of bonds to stocks in their portfolio. However, this popular advice has been hard to reconcile with what theory says is optimal (Canner, Mankiw, and Weil 1997).

Discussion

Poor Cash Management

For any business, mismanagement of cash flow usually proves fatal. Yet many companies officials continue to relegate day-to-day cash fiow to their list of secondary concerns, assuming cash will continue to flow while they focus instead on net profit, market share and other chief features of their business plan.

Unfortunately, poor cash management and forecasting is epidemic in the construction industry, making it difficult for companies to secure lines of credit and properly fund operations.

Cash flow from operations is the cash a company generates from receipts from customers and disbursements for job costs and overhead - but before asset purchases and debt repayment. Over five or more years, cash flows from operations should approximate net income before depreciation. Financially sound companies tend to have a ratio of net income (excluding depreciation) to cash flows from operations that are close to one-to-one over a five-year period.

Companies that aren't faring well tend to have a high ratio of net income to cash flows from operations.

To successfully manage cash flow, there are several steps company executives can initiate. They include:

Elstablishing systems that calculate actual cash flow on a regular, dependable basis: The best of these systems delineate cash flows month by month.

Investing excess cash: When companies find themselves with excess cash, they should begin a dialogue with their financial consultants or bankers about ways the cash can be invested.

Identifying areas of operation wbere cash flow can be increased: The process should begin with accounts receivable. At the most successful companies, receivables average fewer than 40 days old. Contractors should not become complacent about collecting money and should look carefully at how often they under-bill.

Review Literature

In the first part of the 20th century, the school of traditional finance utilized primarily a descriptive methodology. This period was characterized by a strong emphasis on accounting information. Ratio analysis became well established as the theoretical background for securities ...