Financing the Short Term Obligations - Coursework Example

Body Paragraphs Task 1 Short term financing is vital for any kind of business in order to meet its financial necessities in a short period of time. Consequently, there are various sources of attaining short term debts. However, the four primary sources of short term finance available to any business comprise of Trade Credit, Bank Credit, Customers’ Advances and Commercial Paper. Trade Credit implies the allowance of credit businesses by the providers of raw materials and other equipment. In this type of financing, though no cash is allotted to the business, but it is given the permission to holdup the payment for the goods up to the extinction of the credit.

Bank Credit is another significant source of short term financing which allows businesses to draw credit at once or in phases. There are various sub-categories of Bank Credit such as Loans, Cash Credit, Overdraft and Discounting of Bill. The third short term financing source is Customers’ Advances in which businesses ask customers to pay a part of their payment in advance. This is often the case when orders are large as it facilitates the company to overcome its short-term necessities (World Academy Online, 2011).

The fourth source is Commercial Paper, which is a short term unsecured obligation set out by a large company to investors, with the purpose of financing its immediate needs of inventories and other materials. Maturities on such papers do not exceed 270 days and the interest rate is usually less than that offered in bank loans. Since it is not a secured instrument of debt, therefore it is only acceptable if issued by credible organizations (Kacperczyk, 2010) Task 2 1. McDonald as well as Burger King have financed their short term needs and requirements largely through Bank Credits and Trade Credits.

Both the companies have been borrowing capital from banks to buy inventories and goods which are needed urgently. They have also utilized the facility of Trade Credit through their suppliers. In case of Burger King, short term obligations form around half of the total liabilities, indicating significant dependence on short term financing (Burger King Holdings Inc, 2012). In contrast to Burger King, McDonald’s short term obligations form around 33% of its total liabilities (McDonald’s Corporation, 2012) 2.

Burger King Liquidity Ratios 1. Current Ratio = Current Assets / Current Liabilities (2011) = 434,000,000 / 473,000,000 =0.91 x 2. Quick / Acid Test Ratio = (Current Assets – Inventory) / Current Liabilities (2011) = (434,000,000 – 15,400,000)/ 473,000,000 = 0.88 x Efficiency Ratios 3. Debtor Days = Account Receivables / (Sales/360) (2011) = 138,100,000 / (2,502,200,000/360) = 19.87 days 4. Creditor Days = Accounts Payable / (Sales/360) (2011) = (106,900,000) / (2,502,200,000/360) = 15.38 days 5.

Stock Turnover Days = (Inventory x 360) / Cost of Goods Sold (2011) = (15,400,000 x 360) / 1,614,800,000 = 3.43 days McDonald Liquidity Ratios 6. Current Ratio = Current Assets / Current Liabilities (2011) = 4,368,500,000 / 2,924,700,000 = 1.49 x 7. Quick / Acid Test Ratio = (Current Assets – Inventory) / Current Liabilities (2011) = (4,368,500,000 – 109,900,000) / 2,924,700,000 = 1.46 x Efficiency Ratios 8. Debtor Days = Account Receivables / (Sales/360) (2011) = 1,179,100,000 / (27,006,000,000/360) = 15.71 days 9. Creditor Days = Accounts Payable / (Sales/360) (2011) = (943,900,000)/ (27,006,000,000/