Corporate Financial Management: Cycles, Cash, and Islamic Finance

This assignment provides a detailed analysis of corporate financial management, encompassing several key areas. It begins with the calculation of FlowerFashion's operating and cash cycles, including days' sales of inventory and days' sales outstanding. The assignment then delves into cash management, calculating optimal cash balances using both the Baumol and Miller-Orr models. A critical discussion on the rationale behind firms holding cash, along with the consequences of holding too little or too much cash, is also included. Furthermore, the assignment offers a comprehensive comparison of Islamic and conventional finance, highlighting the key features that distinguish them, such as the prohibition of interest in Islamic finance, the asset-backed nature of Islamic financial products, and differences in risk and reward sharing. The analysis covers various aspects, including investment avenues, types of loans, and the treatment of overdraft facilities, providing a clear understanding of the two financial systems and their implications.

Corporate Financial Management

TABLE OF CONTENTS
Question 1..............................................................................................................................3
Question 4..............................................................................................................................5
REFERENCES...........................................................................................................................8

Question 1
a.
FlowerFashion’s operating cycle in the second quarter of 2020
Operating Cycle = Days’ Sales of Inventory + Days’ Sales Outstanding
Day’s sales outstanding = 365 / (Credit sales /average accounts receivables)
= 365 / (120250 / (28000+25000)/2)
= 365 / (28000 / 26500)
= 365 / 1.05 = 347 days
*All quarter 2 sales considered to be on credit.
Days’ Sales of Inventory = 365/(cost of goods sold /average inventory)
= 365/ (90200 / (18250 + 22550) / 2)
= 365 / (90200 / 20400)
= 365 / 4.4 = 82 days
Operating Cycle = 347 + 82 = 429 days
b.
FlowerFashion’s cash cycle in the second quarter of 2020
Days payable outstanding = 365 / (Cost of sales / (Average payables)
= 365 / (90200 / (27000 + 28000) / 2)
= 365 / (90200 / 27500)
= 365 / 3.28 = 111 days
Cash Cycle = Days of Sales Outstanding + Days of Inventory Outstanding - Days of
Payables Outstanding
Cash cycle = 347 + 82 – 111 = 318 days
c.
Calculating the optimal cash balance using the Baumol Model
In this, cash is compared with inventory and applied Economic order quantity model to
derive the optimal cash level to be maintained.
Optimal level of cash balance = SQRT of (2A * F/O)
Where A is cash requirement, O is opportunity cost and F is fixed cost.
= SQRT of (2 (15500) * 20 / 0.12) = SQRT of (5166667) = $2273

d.
Calculating the optimal cash balance using the Miller-Orr Model
Spread = 3* cube root of ((3 * F * σ2) / (4 * K))
= 3 * cube root of ((3 * 20 * 21000^2) / (4 * 0.12))
= 3 * cube root of (55125000000)
= 3 * 3805.831
= 11417.5
e.
Critically discussing on why firms hold cash and any consequences of holding too little
or too much cash
The reason behind holding of cash is very simple as the cash inflow and outflows are not well
defined or organized as there are times when the cash inflow is more than outflows while
sometimes, there are situations in which the cash outflow exceeds the inflow creating a
different situation. Therefore, the cash is held by the company for the purpose of meeting up
with the certain and uncertain future business events and situations. It is important to
understand that increase and decrease in the cash balance is required to be analyzed
effectively in order to avoid the situation of excess cash or too little cash (Harris and Raviv,
2017). The too little cash balance would result into incurring the situation of inability of the
company to meet with its short term business or the operation requirement. This might result
into affecting the overall liquidity position of the business. The insufficient amount of cash
balance results into affecting the daily business operational activities, which might probe the
business entity to take additional funds in the form of borrowing to meet up with the business
requirements. Therefore, in order to avoid the situation of insufficient cash which might lead
to shutdown of the business or selling out its fixed assets, it is essential to create a minimum
amount of cash balance.
On the other under the situation of excess cash, it results into creating three negative
impacts over the business which are – lower return on the assets, rising the cost of capital and
develops the risk of destroying the business value. The exceeding of cash against the
minimum requirement means that the additional cash which is available is adding no value to
the business (Huang and Mazouz, 2018). This amount is also not necessary towards the
financial operations of the business. The rise in the cash balance which would result into
increasing the cost of capital. For instance, if the COC of the firm is 15% and return on Asset
is 10%, the company would be losing money on the capital invested. This would mean selling
out the products at less than its true cost. In addition to this, the excess cash creates a sense of

overconfidence among management team which has a high potential in destroying the
reputation and brand value of the business.
Question 4
Critically analysing the key features which distinguish Islamic Finance from
conventional
finance.
There are various features that different the Islamic finance from the conventional taht
gives assistance in getting deeper knowledge about the same. Islamic finance is basically
concerned with following the rules & regulations set up by Sharia that are distinctive from
the conventional. There is requirements to give deep emphasis to have it's pattern of
providing financial services. There is prohibition of providing finance for the activities that
are restricted by Shania even if it's giving economical and financial benefits. It includes
liquor., pork, etc whereas in the convention banking there is Permission to enlarge such
Practices to get profitability and sustainability of financial industry (Salman, and Nawaz,
2018). In addition to this, certain financial needs of society are being ignored such as
personal loan., working capital requirement in case of non profit based organization.
In order to maintain liquidity the conventional financing has certain avenues
comprising the government Securities, money at call, leasing companies bond, investment in
security exchange market. It gives ability to gain reward in manner of interest that helps in
maintaining higher stable liquidity. In Islamic finance it is not allowed to get invest in
government securities, short term and money based bonds, etc. due to the interest based
transaction patter. From this it can be evaluated that both the type of finance has different
areas of investment.
There are certain other features as well that are taken into consideration by Islamic
Finance (IF) distinctly from the conventional which includes medium long term loans,
leasing etc. There are various types of prohibition strictly imposed by Sharia to fulfill its
objectives of spiritual and cultural values. There high restriction on the transaction which is
concerned with contract that has ownership of goods depends on uncertain event in future.
The firms operating in Islam require to follows the laws & legislation implemented for
deriving smooth functioning in industry (Mazahir, and et.al., 2017). Conventional treats the
money as commodity and lend it against the interest but in IF products are usually assets
backed which comprises renting of assets & participation on profit and loss sharing. These
restrictions are executed for having effectual implementation of principle that wealth must be
generated from legitimate & assets-based trade. In leasing transactions of IF there are certain

differences that make it different from the conventional system. It includes rental under
concerned authorities are not due until the assets is delivered for utilization and in case of
default addition rent cannot be demanded for charging penalty. In the situation of any damage
or misplace there is no permission to claim further installments due to involvement of risk in
the particular transaction.
There is difference in risk and reward sharing pattern of these both system of
finance. Under the conventional system total risk is born by institutions so whole reward is
taken by the them to get higher profitability as they have severed the depositor at fixed rate.
On the other side risk and gain are both shared by the depositors. The risk of the depositors is
connected with the outcomes of the investments which is being made by the IFIs. In case of
Islamic financial system, only IFIs are able to gather the deposits who are having the ability
to build trust in the eyes of the masses which results into leading towards the better and
optimum performance of the financial industry. Next is the extension of the credit facility
pertaining to the business and the industry in regard to the return. Under both the
conventional and the traditional system of finance are providing the financing for rewards.
But the major difference is in the part of the financial agreement (Chong, 2021). The
conventional banks mainly provide the loans or debt pertaining for a fixed reward and on the
other hand, in case of Islamic system, it cannot do that due to the reason that they do not have
the right to charge interest. The Islamic finance system can charge profit over the investment
made but not interest over the debt amount. Within the conventional system, there are mainly
3 types of loans which is being provided to the customers which are short, overdraft and long
term while on the other side, it cannot issue loan apart from the interest free loan for nay need
but it is important to note that they can carry out the business by offering the assets to the
clients.
In regard to the conventional banks, it offers the facility of overdrawing from the
account called as the overdraft facility over which is interest is charged. One of its form
called credit card facility is also provided which limits the drawings this helps the customers
in effectively meeting up with the business requirements without having cash. Pertaining to
the overdraft or the credit card facility, these are not offered under the Islamic finance except
in the form of Murabaha but in order to meet with the need it provides debit card by which
the clients can use the debit card if it carried the credit balance. Under the conventional
system, the customer is required to pay interest over credit or the overdraft amount once
availed however, under the Murabaha, only profit which is due when the assets or the
commodity is delivered to the client is charged with an interest amount (Ibrahim and Alam,

2018). In addition to this, in case of default by the client’s, the customer is additionally
charged with the interest amount for the additional period under the conventional system.
And this is not possible or allowed under the Murabaha. Also, the customer of conventional
system can take the option of rescheduling by the way of entering into new agreement which
is not in the situation or the system of Islamic finance. Therefore, these are the core
difference between the Islamic Finance from conventional finance which incorporates the
certain prohibition imposed under the Islamic financial system like not interest over the loan
amount etc.

REFERENCES
Books and Journals
Chong, F.H.L., 2021. Enhancing trust through digital Islamic finance and blockchain
technology. Qualitative Research in Financial Markets.
Harris, M. and Raviv, A., 2017. Why do firms sit on cash? An asymmetric information
approach. The Review of Corporate Finance Studies. 6(2). pp.141-173.
Huang, W. and Mazouz, K., 2018. Excess cash, trading continuity, and liquidity risk. Journal
of Corporate Finance. 48. pp.275-291.
Ibrahim, M. H. and Alam, N., 2018. Islamic economics and Islamic finance in the world
economy. The World Economy. 41(3). pp.668-673.
Mazahir, and et.al., 2017. An analysis of policy compatibility between conventional
insurance and Islamic insurance policies: a study of conceptual and operational
differences. Jurnal Syariah. 25(3). pp.481-504.
Salman, A. and Nawaz, H., 2018. Islamic financial system and conventional banking: A
comparison. Arab economic and business journal. 13(2). pp.155-167.