Cl Management

7/29/2019 Cl Management

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Presented by:

Jana Aming

Edsel Tiu

John Carlos Wee


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FLOW OF PRESENTATION

INTRODUCTION

FINANCING STRATEGIES

SHORT-TERM CREDITADVANTAGES AND DISADVANTAGES

OF SHORT-TERM FINANCING

SOURCES OF SHORT-TERMFINANCING

FACTORS IN SELECTING SOURCE OF

SHORT-TERM FUNDS


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UNSECURED SOURCES OF SHORT-

TERM CREDIT

SPONTANEOUS SOURCES

TRADE CREDIT

ACCRUALS

NEGOTIATED SOURCES

BANK LOANS SINGLE PAYMENT NOTE

LINE OF CREDIT

REVOLVING CREDIT AGREEMENT

COMMERCIAL PAPER


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SECURED SOURCES OF SHORT-TERM

LOANS

ACCOUNTS RECEIVABLE FINANCING

PLEDGING/ASSIGNMENT

FACTORING

INVENTORY FINANCING

BLANKET (FLOATING) INVENTORY LIEN TRUST RECEIPTS LOAN AND CHATTEL

MORTGAGE

WAREHOUSING RECEIPT LOANS


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INTRODUCTION

One of the most important decisions that

must be made with respect to working

capital management is how short-term

credits will be used to finance workingcapital.


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Financing strategies of the company

usually depends on the financing needs

of the company.

Categories of Financing Needs of the

Company:

1. Permanent Need2. Seasonal Need


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Alternative Short-Term Financing

Strategies/Policies

1. Aggressive Financing Strategy/Policy

2. Conservative Financing Strategy/Policy

3. Hedging (Self-Liquidating) Financing

Strategy/Policy


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SHORT-TERM CREDIT

Also called short-term/current liability,

this is any debt scheduled to mature

within one year or one operating period.


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ADVANTAGES AND

DISADVANTAGES OF SHORT-

TERM FINANCINGAdvantages1. Speed

2. Flexibility

3. Cost Associated to Short-Term

Financing vs. Long-Term Financing

Disadvantage

1. Risks Associated to Short-Term

Financing vs. Long-Term Financing


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SOURCES OF SHORT-TERM

FINANCING

Unsecured Credit Sources

Spontaneous Liabilities

Trade Credit

Accruals

Negotiated Sources

Bank Loans

Commercial Papers

Secured Credit Sources

Accounts Receivable Financing

Inventory Loans

FACTORS IN SELECTING


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FACTORS IN SELECTING

SOURCE OF SHORT-TERM

FUNDS1. The effective cost of credit.2. The availability of credit.

3. The influence of the use of a particular

credit source on the cost and

availability of other sources of

financing.

4. Any additional covenants or restrictions.


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Current Liabilities Management


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UNSECURED SOURCES OF

SHORT-TERM CREDIT

These include all those sources that

have their security only the lenders faith

in the ability of the borrower to repay the

funds when due. They are obtainedwithout pledging specific assets as

collateral.

Unsecured sources fall in two majorcategories:

1. Spontaneous Sources, and

2. Negotiated Sources.


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SPONTANEOUS SOURCES

These are short-term credits arising

from the normal course of business.

There are no interest costs attached to

these sources. However, they may havesome implicit costs.

Two major sources:1. Accounts Payable

2. Accruals


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TRADE CREDIT (ACCOUNTS

PAYABLE)

This is a debt arising from credit purchases

by a firm without issuing any formal note as

an evidence of the firms liability to its

supplier(s). It is considered as a primary source of

spontaneous financing because it arises

from ordinary business transaction.


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TRADE CREDIT TERMS

Cash on Delivery (COD) and Cash

Before Delivery (CBD)

Net Period

Without Discount

With Discount

Dating


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TRADE CREDIT FINANCING

Availing trade credits, technically, is not

discretionary financing strategy.

The discretionary portion of trade credit

financing lies on the period when thecompany pays its accounts payable.

Payment decisions:

1. Taking the cash discount.2. Payment at the last day of credit terms.

3. Stretching accounts payable.


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COST OF CREDIT TRADE

FINANCING

Without Cash Discount:

IMPLICIT COST: The difference

between the selling prices through cash

purchase and credit purchase. (If creditpurchases are stated higher than cash

purchase)

EXPLICIT COST: NONE


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COST OF CREDIT TRADE

FINANCING

With Cash Discount:

IMPLICIT COST: Annualized Cost of

Foregone Discount

EXPLICIT COST: NONE


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ADVANTAGES OF TRADE

CREDIT

Availability readily available; no need

for negotiation, unless required by the

supplier.

Flexibility payment can be madeanytime within the credit period and may

be stretched depending on the

negotiation with the supplier.


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ACCRUALS (ACCRUED

EXPENSES)

These are company liabilities for

services that have been provided for the

company but are not yet paid.

Common sources of accruals:

Labor (Salaries and Wages)

Taxes Interest


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ACCRUAL ACCOUNTS

FINANCING

Like trade credits, availing of accruals as

financing source is technically non-

discretionary in nature.

Also, only accruals controllable by thecompany may have discretionary

characteristics in this source of

financing. Taxes are controlled by the government (due

dates are set, usually 10-15 days after close

of each month.


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ACCRUAL ACCOUNTS

FINANCING

The most common source of accrual

accounts financing is the unpaid salaries

of employees.

The company may have the discretionon the period of payment for the

employees salary (e.g. monthly at the

end of each month, monthly at ten daysafter close of each month, every half a

month, etc.).


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COST OF ACCRUAL

FINANCING

IMPLICIT COST: NONE

EXPLICIT COST: NONE


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NEGOTIATED SOURCES

These are short-term credits arising

from the negotiation entered into by the

borrowing firm and the potential

creditors, usually banks and othercorporations, evidenced by a formal

note or some other documents.

Two major sources:

1. Bank Loans

2. Commercial Papers


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COMMERCIAL BANK LOANS

These are short-term business creditprovided by commercial banks, requiring

the borrower to sign a promissory note

to acknowledge the amount of debt.

Types of Short-Term, Unsecured Bank

Loans:1. Single-Payment Notes

2. Lines of Credit

3. Revolving Credit Agreements


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SINGLE-PAYMENT NOTE

This is a short-term, one-time loan made

to a borrower who needs funds for a

specific purpose for a short period.

Resulting instrument: A Note stating the

terms of the loan, including the maturity

period of the loan and the interest rate,usually stated on a per annumbasis.


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LINE OF CREDIT

This is an informal agreement between

a bank and a borrower-company

specifying the maximum amount of

unsecured short-term borrowing thebank will make available to the firm over

a period of time, usually one (1) year

and subject to one (1) year renewals.


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LINE OF CREDIT

Some Restrictions/Conditions:

Operating-Change Restrictions contractual

restrictions that a bank may impose on a

firms financial condition or operations aspart of the agreement

Compensating Balances a required

account balance equal to a certain

percentage of the amount borrowed from thebank under the same agreement.


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LINE OF CREDIT

Some Restrictions/Conditions:

Annual Cleanup the requirement that for a

certain number of days or months during the

year, borrowers under a line of credit carry azero-loan balance.

Interest Rate on this type of agreement

is usually stated as a floating rate the

prime rate plus a premium.


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REVOLVING CREDIT

AGREEMENT

This is a formal, legal commitment by

the bank to extend credit up to a stated

maximum amount for a given period of

time.

Due to the features of this type of loan,

the bank usually charges commitmentfee on an amount unused by the

borrower.


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COST OF BANK LOANS

EXPLICIT COST: Effective Interest on

the Loan, plus add-ons (Premium,

Compensating Balances, etc.)


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COMPUTING EFFECTIVE

INTEREST RATES

Without Compensating Balance:

Simple Interest:

Discount Interest:


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COMPUTING EFFECTIVE

INTEREST RATES

With Compensating Balance:

Simple Interest:

OR


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COMPUTING EFFECTIVE

INTEREST RATES

With Compensating Balance:

Discount Interest:

OR


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COMMERCIAL PAPER

This is an unsecured short-term

promissory note issued by large, strong

credit rating companies to other

companies and institutions, such as trustfunds, banks and insurance companies.

Commercial papers can be obtainedthrough the money market (a type of

financial market for trading of short-term

securities).

ADVANTAGES AND


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ADVANTAGES ANDDISADVANTAGES OF

COMMERCIAL PAPERSADVANTAGES: Less costly than trade credit and bank

loans.

Not subject to possible restrictive

covenants contained in most bank loans.

ADVANTAGES AND


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ADVANTAGES ANDDISADVANTAGES OF

COMMERCIAL PAPERSDISADVANTAGES: Commercial papers have fixed maturity

rate, exposing it to liquidity risk (the risk of

non-conversion of the security into cashat maturity).

Commercial papers have limited access

and user availability.


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COST OF COMMERCIAL

PAPER

EXPLICIT COST: Effective Interest Cost

plus Issue Cost

Computation:


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Current Liabilities Management


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SECURED SOURCES OF

SHORT-TERM LOANS

These are short-term loans that use

some specific assets as collateral in

securing the loan.

Assets typically used as collateral in

secured short-term credits:

1. Accounts Receivable, and2. Inventory (Merchandise/Finished Goods).


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ACCOUNTS RECEIVABLE

FINANCING

Accounts Receivables (Trade Receivables)

are financial assets of a company arising

from the sale of companys goods and

services to customers. They represent acontractual right of the company to receive

cash from the customer.

The use of accounts receivable in obtainingloans are considered to be common to

most enterprises because of its being

attractive to most lenders due to its

liquidity.


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ACCOUNTS RECEIVABLE

FINANCING

Two means of using accounts receivable in

obtaining short term financing:

1. Pledging or Assignment of Accounts

Receivable2. Factoring of Accounts Receivable


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PLEDGING OR ASSIGNMENT

OF ACCOUNTS RECEIVABLES

In this form of accounts receivable

financing, certain amount of accounts

receivable are pledged or assigned as a

collateral to a loan. The Pledging Process:

1. Selection and evaluation of accounts

receivables used as collateral;

2. Adjustment of receivable value for

allowances, usually on a fixed percentage;

3. Determination of loan amount.

G G O SS G


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PLEDGING OR ASSIGNMENT

OF ACCOUNTS RECEIVABLES

Pledging can be made on a notification

or non-notification basis.

In a non-notification basis, the borrower

continues to collect from the customers theamount of the receivable and remits the

same to the lender.

In a notification basis, the borrower notifies

the customers to remit their payment directlyto the lender.

ADVANTAGE AND


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ADVANTAGE ANDDISADVANTAGE OF

PLEDGING/ASSIGNMENTAdvantage: Flexibility in the use of accounts receivable

as collateral

Disadvantage

Relative higher cost compared with other

short-term financing sources.

COST OF PLEDGING


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COST OF PLEDGING

ACCOUNTS RECEIVABLE

EXPLICIT COST: Effective Cost

Computation:

FACTORING OF ACCOUNTS


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RECEIVABLES

This form of accounts receivable

financing involves the outright sale of

accounts receivable, usually at a

discount, to a finance company knownas a factor.

The Factoring Process:

1. Selection and evaluation of accountsreceivables used as collateral;

2. Determination of loan amount, considering

retention of certain amount for any

allowances and returns.



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RECEIVABLES

Factoring of accounts receivable are

usually done on a notification basis and

are oftentimes made on a nonrecourse,

thus substantial transfer of risks andreturns of ownership to the receivable is

made.

COST OF FACTORING


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COST OF FACTORING

ACCOUNTS RECEIVABLE


Computation:


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INVENTORY FINANCING

Inventories are goods or items which are

held for sale in the ordinary course of

business, or those which are in the

process of production for such sale, orthose materials or supplies that are to

be consumed in the production process

or in the rendering of services. They

also encompass those goods purchased

and are held for resale by the company.


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INVENTORY FINANCING

Because of the marketability of

inventories and their market value being

usually higher than the book value,

inventories are also desirable forms ofcollateral for loans.

However, not all types of inventories

may be used as collateral. The best inventory items to be pledged

as collateral for loans are those that are

highly marketable and generic in nature.


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INVENTORY FINANCING

Forms of Inventory Financing:

Blanket (Floating) Inventory Lien

Trust Receipt Agreements/ Chattel Mortgage

Warehouse Receipt Loans

BLANKET/FLOATING


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BLANKET/FLOATING

INVENTORY LIEN

Under this form of inventory loan, the

lender has a general claim over the

inventory items held by the borrower,

thus no specific item is assigned to theloan.

The borrower, in this type of inventory

loan, retains full control over theinventory.

TRUST RECEIPTS LOAN AND


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CHATTEL MORTGAGE

Under the trust receipt loan and chattel

mortgage, certain inventory items are

specifically identified and are used as

collateral for loan. Oftentimes, theseinventory items are identified via serial

numbers. The items used as collateral

are still being held by the borrower.



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CHATTEL MORTGAGE

In the chattel mortgage, the sale of the

inventory items may not be done unless

consented by the lender.

In the trust receipts loan, a trust receipt isgenerated and is being used in selling of the

items. Thus, there is general permission on

the sale of the inventory items by theborrower in trust of the lender, the proceeds

from the sale of which should be remitted by

the former to the latter.


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WAREHOUSE RECEIPT LOAN

This is an arrangement whereby the

lender receives full physical and legal

control of the identified inventory

collateral, which is stored under the careof a warehousing company serving as

an agent of the lender.

Two types of warehousing agreement: Terminal Warehouse Receipt Loan

Field Warehouse Receipt Loan

COST OF INVENTORY


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COST OF INVENTORY

FINANCING


Computation:


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REFERENCES:

BOOKS:

Cabrera, Ma. Elenita, FINANCIAL MAANGEMENT, PART

I, 2012 Edition, Conanan Educational Supply, Manila

E-BOOKS:Gitman, Lawrence J., PRINCIPLES OF MANAGERIAL

FINANCE, 10th Edition

Brigham, Eugene F. and Houston, Joel F.,

FUNDAMENTALS OF FINANCIAL MANAGEMENT,10th Edition

Van Horne, James C., FINANCIAL MANAGEMENT AND

POLICY, 12th Edition


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