Firms aim to optimize their cash flow by improving the speed of collections and strategically extending disbursements.

To enhance collections, companies can establish multiple collection centers in different locations, which reduces the time required for customers’ payments to reach the firm. Another effective method is adopting a lockbox system, allowing banks to process and clear checks quickly and at a lower cost.

Regarding disbursements, the general strategy is to accelerate the processing of incoming checks while delaying payment procedures without harming supplier relationships. This approach keeps cash on hand longer, strengthens liquidity, and improves overall cash management efficiency.

• To handle routine and planned payments.

• To maintain compensating balances for banking services.

• To cover unexpected shortages in cash inflows, especially in seasonal industries.

• Cash Flow Cycle , Short Paragraph

The cash flow cycle represents how money moves in and out of a firm on a daily, weekly, and monthly basis. Its efficiency depends on how fast customers pay, how quickly suppliers process payments, and how effective the banking system is. Proper synchronization of inflows and outflows ensures the firm can meet its transaction needs without disruptions.

• Good management of current assets increases market share and stock value.

• Current assets include: cash, marketable securities, receivables, and inventory.

• Cash & securities focus on safety and liquidity first, profit second.

• Receivables & inventory must meet ROI standards, not old habits.

• Different assets need different decision methods.

It's like putting your company's cash in a high-interest savigs accant in a kinancially strong country. Any, spare change gets automaticaly swept dere so your money's always caming, not just sitting around

• Goal: Make idle cash can money.

• How? Keep it in strong aurencier/countries with high interest eter.

• Tool: Sweep account that automatically invest spare cash.

This immediate transfer of funds could eliminate the "float," which is the delay between when a payment is made and when the money is actually available in the recipient's account. Traditionally, this float period allowed banks to earn interest on the money during the delay. With FedNow, since money moves instantly, this float period could cease to exist, changing how banks handle and benefit from payment processing.

FedNow is a new payment system launched in 2023 that lets people and businesses send and receive money instantly, any time of day. It moves money directly into bank accounts without delay. Because of this instant transfer, the traditional "float"—the waiting time when banks hold funds before they clear—may disappear. This could impact how banks manage money and earn interest from these delays.

International Cash Management

• Companies choose which currency to hold their cash in.
  They prefer currencies with higher interest rates and strong, stable value.

• Managers try to keep cash in countries where the currency is strong to avoid losses.

• A sweep account keeps the main account at zero balance.
  Any extra cash is automatically moved to an account that earns interest.

SWIFT (Society for Worldwide Interbank Financial Telecommunications):

• A secure system for international electronic money transfers.

• Encrypts and authenticates every transaction.

• Ensures accuracy, completeness, and confidentiality.

• Takes financial responsibility for transaction security.

In short: Safe, global, encrypted money transfer system.

( S/23 )

Marketable Securities: Short-term, interest-earning investments for funds not needed immediately.

Examples:

• Treasury Bills

• CDs (Certificates of Deposit)

• Commercial Paper

• Money Market Funds/Accounts

Key: Safe, liquid, short-term profits.

Electronic Funds Transfer (EFT)

• EFT means moving money electronically between computers without using checks.

• It reduces float because the store and the bank communicate instantly.

• The money is taken from your bank account immediately when you make a purchase.

• Automated Clearing Houses (ACH):
  ACH systems transfer payment information between different banks and move money from one account to another automatically

Dun & Bradstreet is a leading provider of business information. It offers analysis tools, publishes reference materials, and gives computerized access to company data. DBIS also assigns the D-U-N-S number, a unique nine-digit code used to identify businesses and track groups of companies linked by ownership.

Financial managers need to know how cash flow is going and working. Even with online payments the cycle is slowed down because of collection ways like lock boxes, mail delays and international payments.

Explanation

Online payments make everything faster but collection still takes time especially when depending on mail, bank lockboxes or payment from different countries

Summary 2

Float is the gap between what a company records as received and what the bank actually received there is 2 types mail float (delayed mail). And clearing float (delay while a check clears).

Explanation 2

Float occurs because payments don’t instantly become usable money it actually takes time to get processed by banks expect for small businesses .

The Cash Flow Cycle (Expanded)

The cash flow cycle describes how money moves through a business, starting from operations and eventually returning as cash. It highlights the interdependence of sales, inventory, and receivables in maintaining liquidity.

1. Customers → Sales → Cash

   • Customers drive revenue by purchasing goods or services.

   • Sales may be cash sales (immediate payment) or credit sales (payment delayed).

   • Cash inflow is essential to fund operations, pay suppliers, and invest in growth.

2. Sales → Accounts Receivable → Cash

   • For credit sales, the business records an accounts receivable.

   • Accounts receivable represents money owed by customers.

   • Efficient collection of receivables accelerates cash flow, which is crucial for maintaining liquidity.

3. Cash → Inventory → Sales

   • Cash is used to purchase inventory or raw materials needed for production or resale.

   • Inventory is converted into products or services, which are then sold to customers.

   • The speed of this conversion affects the inventory turnover rate and overall cash flow efficiency.

4. The Cycle is Continuous

   • Once inventory is sold and cash is collected, the business can reinvest in new inventory.

   • The faster this cycle completes, the more efficient the business is at generating cash from its operations.

     
     

Customers lead to Sales, and Sales generate Cash, either immediately or through credit.
Once cash is received, it flows into several essential business areas:

1. Inventory, Materials, and Services

Cash is used to support day-to-day operations.

• Inventory Types:

  • Finished goods: Ready to sell.

  • Goods in process: Products still being made.

  • Raw materials: Inputs needed for production.

• Materials & Services:

  • Suppliers → Accounts Payable: Payments owed for materials.

  • Labor → Wages Payable: Employee compensation due.

  • Other expenses: Utilities, maintenance, and service costs that keep operations running.

2. Government Taxes

Cash is allocated to meet legal and regulatory requirements.

• Federal income taxes

• State and local taxes

• Other business taxes (e.g., payroll, property, or sales tax)

3. Short-Term Lenders

Cash is used to repay short-term financing that supports working capital.

• Commercial banks

• Nonbank lenders

• Foreign banks or financing sources

• Payments may include principal and interest

4. Interest and Dividends

• Interest: Paid to lenders for borrowing funds.

• Dividends: Distributed to shareholders when the company shares profits.

5. Marketable Securities

• Excess cash may be invested in short-term securities to earn a return until needed.

Sales Categories

Sales can be analyzed or broken down by:

• Geographical area

• Product or division

• Customer type

This helps management understand where revenue is coming from.

Accounts Receivable

Sales made on credit create accounts receivable, which collect cash over set periods:

• 0–30 days (current)

• 31–60 days

• 61–90 days

• 91–120 days (slow-pay or overdue)

The faster receivables are collected, the stronger the cash flow.

Q1 ANSWER:

Fiscal policy is a basic system of a state that

is directed by the government to allocate the

state’s resources. Other than fulfilling

justice principal, fiscal policy also

impacting multidimensionality of people’s

lives. Tahir (2013) stated that fiscal policy

related to state’s budgets decided by the

government. The term government is

described as central government, municipal

government, and local government.

However, there have been many sources

stated that central government is the subject

of fiscal policy. Fiscal policy generally

includes government expenditures, tax and

transfer, and debt management as well.

2. Explain Islamic fiscal policy applications with examples (5 marks)

Q2 ANSWER:

Real application of Islamic fiscal

policy that includes Islamic variables such

as zakat, infaq, alms, wakf, jizyah,

ghanimah, ushr, kharaj, and others was only

evidently implemented in early days of

Islamic civilization, started from Prophet

Muhammad SAW., until continued by

Khulafaur Rashidin. Islamic fiscal policy

also still be seen clearly when the Islamic

caliphs were in power, such as during the

Abbasid dynasty when caliph Harun Ar-

Rashid led or Caliph Umar Bin Abdul Aziz

who recorded extraordinary receipts and

uses of zakat. Nowadays, Islamic fiscal

policy instrument that is still widely used is

zakat. However, not all countries that have

regulation about zakat made this instrument

to be official income, which means zakat is

collected and distributed by legal

institutions, official agency and NGO, but it

is excluded from the state budget

management.

3. Describe Bahrain's economic income, growth, and its financial sector (10 marks).

Q3 ANSWER:

Bahrain is one of a state in the

Middle East Region that is interesting for

further analysis. The state that adheres to

monarchical system of government

(kingdom) is 20% of its state income

depends onto hydrocarbons sector, 16.8% is

contributed by financial sector, 14.1% is

dominated by the manufacturing sector, and

the rest is contributed by other sectors. Like

most countries globally, Bahrain’s

economic growth also decreased by

8.9%yoy due to the Covid-19 pandemic.

The oil sector contributed to increasing the

Real GDP growth rate by 3.2%yoy, but

Nominal GDP fell by 47.9% due to the

decline in oil prices to the lowest level. The

non-oil sector contracted by 11.5% in real

terms and 14.7% in nominal terms (ICD,

2020). Bahrain’s financial sector which

ranked third in its contribution to Bahrain’s

GDP is also interesting to examine more

deeply. The development of Islamic finance

in Bahrain is noteworthy as well. According

to ICD (2020) data, Bahrain ranks third in

Islamic Development Index category,

which is below Malaysia and Indonesia.

Total Islamic financial asset of Bahrain is

USD 96 billion, where this value reaches

124% of its GDP.

• Uncollectible accounts (10%) = $1,000

• Net incremental revenue = $9,000

• Collection costs (5%) = $500

• Production and selling costs (77%) = $7,700

• Annual income before taxes = $800

• Taxes (40%) = $320

• Annual income after taxes = $480

The average accounts receivable investment is calculated as:

$10,000 ÷ 6 = $1,667

Finally, an investment of $1,667 generates an after-tax return of $480, which is about 28.8%.

Inventory decisions balance two costs:

• Carrying costs: interest, storage, insurance, handling, and risk of obsolescence.

• Ordering costs: cost of ordering and processing items into stock.

Produces the same amount all year. It uses workers and machines efficiently but can create large inventories during off-season.

Seasonal Production:

Matches production with seasonal demand. Avoids extra inventory but can cause idle capacity in slow periods and overtime/inefficiency in peak periods.

• Stockout happens when the firm:

  • Runs out of a specific inventory item.

  • Cannot sell or deliver the product.

  
  

• Safety stock helps:

  • Reduce the risk of losing sales.

  • Cover unexpected demand.

  
  

• Downside of safety stock:

  • Increases inventory carrying costs.

  
  

• Why it is still worthwhile:

  • Prevents losses from stockouts.

  • Allows profit from unexpected orders.

  
  

EOQ is a formula used in inventory management to determine the optimal number of units to order at a time. The goal is to minimize total inventory costs, which include:

1. Ordering Costs (O): Costs that occur every time you place an order.

   • Examples: shipping, processing purchase orders, and administrative work.

2. Carrying Costs (C): Costs of holding inventory in stock.

   • Examples: storage, insurance, depreciation, spoilage.

EOQ balances these two costs. If you order too frequently (small orders), the cost of ordering goes up. If you order too much at once (large orders), carrying costs go up. EOQ finds the “sweet spot.”

EOQ Formula:

Where:

• S = Total demand (units per year)

• O = Ordering cost per order

• C = Carrying cost per unit

Example:

Suppose a shop sells 2,000 pens per year.

• Ordering cost = $8 per order

• Carrying cost = $0.20 per pen

  
  

 This means the shop should order 400 pens at a time to minimize total inventory costs.

While JIT system is its main strength is having almost no extra inventory can became its biggest weakness when things get unpredictable.

1. Fragile supply chain: any delay from a supplier con stop production completely, leading to lost sales.

2. Struggles with suprises: It can't ramp up enough for a sudden sales boom, and can leave with piled-up inventory during a sales bust.

3. Needs Constant updates: In fast changing industries, the system requires frequent and costly re-evaluation to stay effective.