Tackling CAT T10

This paper is a management paper, what this indicates? This means that calculations alone won't help you pass the exam. Normally over 40% is about theories so you must really understand and able to demonstrate your knowledge in many areas. Starting December 2010, examiner has changed so don't analyse past year papers and study the topics selectively, we never know what the new examiner will do, but the format of the paper remains the same. The syllabus of this paper is quite big, here are some advices for each syllabus area.

1. Cash receipts and payments
This introduces you about the different between cash and accrual accounting, we prepare cash budget on the cash basis. Cash budget is a more popular exam question compared to other forecast such as cleared funds forecast or forecast statement of cash flow. You must always remember that only items involving cash flows will be included in cash forecasting. Theory question may test you on the understanding of treasury in the organisation or Baumol cash management model.

2. Cash balances
With the extra funds, you should be able to suggest some ways to invest the money, the knowledge of source of finance may help you in this part. Before investing the extra funds, one should consider the risk, liquidity (how easily it can be converted to cash), maturity (time to mature) and return. I suggest you to read the article by former examiner titled "investing cash surpluses".

3. Working capital management
This includes managing working capital cycle, inventory, payables and receivables. Working capital cycle or cash operating cycle is important for the company to stay liquid and "functioning", it is quite straightforward to calculate, practice the past year questions, long working capital cycle will indicate liquidity risk. You may also be asked to calculate the required working capital based on the budgeted inventory days, receivable days and payable days given. Managing inventory is something quite simple in T10, knowledge of T4 has covered most of it except just-in-time (JIT), here I will suggest you to read an article by new examiner titled "inventory control". Managing payables is a small area normally examined together with inventory, common question will be to ask you to decide whether to order based on EOQ or order more to get discount. Managing receivables will be a big one so I would discuss it separately.

4. Credit management
The theories in this part are very important. When we are talking about managing receivables, credit policies are important which determine how the credit term is given. You have to know some internal and external source of information to decide the creditworthiness of the customer before giving credit. Some legal issues may be asked, for example the elements of contract.
For collection of debts, company can choose to offer early settlement discount to encourage early payment, maximum discount to be offered could be asked. Company can also employ factoring or invoice discounting service, the main difference between them is that factor will administer the sales ledger while invoice discounter will not administer the sales ledger, invoice discounting is only used to raise finance. You may be required to decide the viability of using factoring service, just calculate the cost of factoring and the cost of not factoring which is relatively straightforward, there are a number of past year questions to practice (important for June 2011). Finally, collection of debt through legal proceeding is less common, I suggest you to read former examiner article titled "managing debtors".

5. Source of finance
This is a full theory part, be sure you are familiar with this area. Financial markets, economic environment, short, medium and long-term finance and also finance for SMEs are discussed in this area. Questions normally focus on long-term finance and financial markets in the past, if you did learnt everything in this area by understanding different types of finance (and memorise something if possible since you are new to the finance world), you will earn a lot of easy marks in exam because questions on this area are normally easy. Many people failed T10 because of leaving out this area.

6. Short-term decisions
This is more related to T7 but is added to T10 and deleted from T7 to balance the syllabus coverage. This includes relevant costing, short-term decisions such as make-or-buy and limiting factor and finally CVP analysis. All of these have been covered in T4, so you should be happy with them, but if you are not good in these, be sure to master them, CVP analysis is quite popular and is asked in 3 consecutive exams. If a question comes out from this area, you should be able to deal with it using T4 knowledge.

7. Capital investment appraisal
You also learnt it in T4, in T10 it is more detailed requiring you to calculate the net cash flows. In every exam, this area will surely appear as one of the four questions in section B. Techniques to be familiar include accounting rate of return (ARR), payback, discounted payback, net present value (NPV) and internal rate of return (IRR). Theory question would ask you to give the advantages and disadvantages of the techniques above and also the capital investment procedures. If the question requires you to use NPV approach to appraise the project, relevant costing knowledge is important to determine the relevant cash flows. There are many past year questions to practice and I will suggest you to read the article by former examiner titled "capital investment appraisal". (Note: not the Nigel Coulthurst's article).

In summary, to pass T10:
1. Never ignore theories (essential)
2. Think outside of the box when answering question, be practical and apply knowledge specifically to the question.
3. Focus on key areas (source of finance, cash budgets, working capital management, credit management, short-term decisions and capital investment appraisal.
4. Do not be selective in the topics to study.
5. Answer easy question first in exam, there is normally at least one question which is more difficult than the others.
6. Read the articles that I suggested above which I think are more useful.
7. Practice some past year questions, don't learn the ways to do them, learn "why" the ways are used.