And, the day-to-day operations include payment of wages to employees and payment for inventory as well. Technically speaking, time duration covering the definition of short term finance is of one year. Any short term finance must be repaid within one year period. Following are the four different sources of short term finance available to business: Overdrafts Trade credit Short term loans Lease finance Overdrafts Overdraft means the amount overdrawn from bank (Siddiqui & Siddiqui 2007).Overdrafts are deficits which are financed by the bank. The overdrafts are results of payments exceeding income in the current account. Overdrafts can easily be availed and remain flexible with regard to the amount borrowed at any point of time and only sum of interest is paid when the account is overdrawn. A particular overdraft limit is set that should not be surpassed. Repayment is carried out on demand and security depends on the facility size or overdraft limit. Trade Credit Trade credit may be defined as credit which is granted on account of transactions of one firm with other firms (Ball 2009). Trade credit is a type of short term loan. Trade credit represents an interest free short-term loan. And, the main purpose of extending this facility is to enable businesses to purchase current assets on credit with payment terms normally existing between 30 to 90 days. Short term loans A short term loan is a loan for a specified fixed amount for a particular period. It is drawn in toto at the start of the short term loan period and through defined instalments, it is repaid. Some conditions are attached with the short term loan and the borrower is under compulsion to comply with. Short term loan is not repayable on demand by the bank. The examples of short term loans are trade credit, bank loans and commercial papers (Gitman & McDaniel 2006). Lease finance A business instead of buying an asset outright may lease an asset consuming available resources or borrowing funds. The ownership and control are not availed by businesses. The lessor retains the asset ownership. The lessee enjoys asset possession and use of the leased asset on payment of a particular sum of rentals over a period. And, operating lease is a form of short term lease (Bhole & Mahakud 2009). Sainsbury and Tesco meeting their short term obligations Companies account for their short term obligations under the label of current liabilities. Sainsbury is using almost every source of short term finance in order to meet its short term obligations in the financial year 2011. Sainsbury uses overdrafts, bank loan, which is due in 2012 and finance lease obligations which are also due in the same year. The closer analysis shows that Sainsbury has used borrowings of 74 million pounds and 59 million pounds from derivative financial instruments. This shows that the company has used more borrowings than derivative financial instruments (Sainsbury Annual Report 2011). Tesco has also used borrowings and derivative financial instruments to fulfil its day-to-day cash requirements. Tesco borrowed ? 1386 million and ? 255 million were obtained through derivative financial instruments (Tesco Annual Report 2011). In the borrowed figure, finance lease amount was ? 50 million and bank
Title: Financing the Short Term Obligations of the Business Name: Group: Date: Introduction The purpose of this report is of twofold: to highlight and understand four short term finance sources available to business in order to fulfil its short term business commitment; to practically apply the use of liquidity ratios and the efficiency ratios to comprehend how businesses use these sources in order to meet their day-to-day operations requirements…
This research is being carried out to evaluate and present sources of short-term finance. This research is the best example of comparison of working capital performance. The following paper also gives an overview of the liquidity ratio and efficiency ratio, in particular, of debtor days; creditor days and stock turnover days.
The short-term finance refers to that finance which is obtained for a shorter period of time, generally for a period of less than one year. After obtaining the short-term finance, the companies make use of it in either raising working capital for the business or financing other areas of the business.
There are several ways of raising short term funds for the business which are: a. Commercial Loan and bank overdrafts Commercial loans are loans usually provided by banks for the financing needs of a business. Commercial banks typically offer straight term loans to credit lines that would be used in the various operation of the business (Raiborn 2010).
This report has been developed as a financial training tutorial for medium enterprises in the local area. Therefore, main objective of this report is to make the participants clear understand about one of the most important areas business finance i.e. source of finance.
Capital assets are properties own by the Company whose useful life is greater than one year, and are likely to earn sufficient income to cover the operating expenses and amortized acquisition cost associated with it (Baker, & Powell, 2005). Land, buildings, facilities, equipment, machinery, and vehicles are examples of assets.
Alternatively, the financial planning helps corporations to estimate asset investment requirements in order to achieve long term objectives. Financial planning activity starts from the analysis of business environment and feasibility of business model. Then it identifies the sources needed to achieve these objectives in monetary units by quantifying scarce resources such as raw materials for production process, labor, necessary equipments, inventory, and so on.
The different type of financing options available for the company is debt financing and equity financing. In debt financing, the company can acquire loan through bank, commercial paper, creditors and bond issuance. On the other hand, in equity financing, the company can obtain funds by issuing shares publicly both common and preferred.
Commercial banks typically offer straight term loans to credit lines that would be used in the various operation of the business (Raiborn 2010).
Retained earnings are profits that have been retained within the business for use in the
An operating budget should be ready for an annual operational cycle. Types of operating budgets include; the sales budget, production budget, labour budget. Capital budgets in a company use up a lot of money in catering for
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