INTRODUCTION TO BUSINESS FINANCE

CREDIT TERMS Standard or negotiated terms (offered by a seller to a buyer) that control the monthly and total credit amount, maximum time allowed for repayment, discount for cash or early payment, and (4) the amount or rate of late payment penalty 1-       credit discount 2-       discount period 3-       credit period When a customer takes an early payment  discount  to pay for an invoice, the accounting for the transaction is: Debit cash for the amount of cash received. A  discount period  is the amount of time a cash  discount  is available for a customer to make a reduce cash payment The  credit period  is the number of days that a customer is allowed to wait before paying an invoice. EXPLANATION WITH EXAMPLE 2/10 and N/30 The term of credit already mention on the invoice. Usually credit term may state 2/10, N/30. The first nu...

ECONOMIC ORDER QUANTITY Economic order quantity  (EOQ) is a decision tool used in cost accounting. It’s a formula that allows you to calculate the ideal quantity of inventory to order for a given product Economic order quantity uses three variables:  demand relevant ordering cost relevant carrying cost.  ·          Demand:  The demand, in units, for the product for a specific time period. ·          Relevant ordering cost:  Ordering cost per purchase order. ·          Relevant carrying cost:  Carrying costs for one unit. Assume the unit is in stock for the time period used for demand. Note that the ordering cost is calculated per  order . The carrying costs are calculated per unit. Here’s the formula for economic order quantity: Economic order quantity = square root of [(2 x demand x ordering costs) ÷ carryi...

INVENTORY MANAGEMENT Inventory management refers to the process of ordering, storing and using a company's inventory: raw materials, components and finished products. GOALS OF INVENTORY MANAGEMENT Inventory management is essential for a business to succeed. Good management of your company’s stock decreases excess inventory and ensures that you have enough product on hand to meet customer demand. Develop an inventory management plan to streamline ordering and reduce wasted time on inventory control. Ensuring Safety of Inventory One of the goals of inventory management is to keep products safe. Inventory should be kept in a safe area, where it is protected against theft. Depending on the size of your company, this could mean using surveillance equipment, guards or alarm systems. The inventory should be handled carefully, as well, to avoid breakage. Broken or lost inventory means a financial loss for your company. Tracking Sales Track and review company sales on a...

The Baumol cash management model Baumol  noted that cash balances are very similar to inventory levels, and developed a model based on the economic order quantity (EOQ). Assumptions: cash use is steady and predictable cash inflows are known and regular day-to-day cash needs are funded from current account buffer cash is held in short-term investments. The formula calculates the amount of funds to inject into the current account or to transfer into short-term investments at one time: Q=square root 2 into C0 into D divide by Ch  where: C O  = transaction costs (brokerage,commission, etc.) D = demand for cash over the period C H  = cost of holding cash. The model suggests that when interest rates are high, the cash balance held in non-interest-bearing current accounts should be low. However its weakness is the unrealistic nature of the assumptions on which it is based. Example using the Baumol model A company generates $10,000 per month...

FLOATS Cash float  refers to the difference between the  cash  balance recorded in your accounting system's  cash  account and the amount of  cash  showing in your company's bank account balances.                                                            OR  Disbursement  float  occurs when you write a check and the recipient has not yet cashed the check. TYPES OF FLOATS 1-        Postal float 2-        Lethargy float 3-        Deposit float POSTAL FLOAT In that check are received through the post offices and that take tie to deliver the checks from customer to the firm. LETHARGY FLOAT Time taking in processing the check within the organization and sending int...

MAIN PURPOSE OF CASH MANAGEMENT ACCORDING TO COMPANY 1     1-   Collections 2-     Payments MANAGING CASH COLLECTION AND DISBURSEMENTS and TECHNIQUES 1-        Accelerating cash collections/ cash inflows 2-        Slowing down the cash outflows   3-        Controlling disbursement ACCELERATING CASH COLLECTION 1-        Decentralized collections 2-        Prompt payments by the customer PROMPT PAYEMENTS BY THE CUSTOMER In order to accelerate cash inflows the collection of the payments from the customer should be prompt and it is possible by prompt revising or invoices. Quick conversation into cash can also help. Cash flow can be accelerate by improving cash collection process and effective cash collection management. It can be possible if the time taken in deposit ...

CASH MANAGEMENT A company ability to allocate a funds efficiency in an effective way to cover operating expenses, make investment, repay shareholders and maintain adequate reserves Four facts of Cash Management 1-       Cash planning 2-       Managing the cash flow 3-       Optimum cash level 4-       Investing surplus cash MOTIVE OF HOLDING CASH 1-       Transaction motive 2-       Speculative motive 3-       Precautionary motive TRANSACTION MOTIVE Holding cash to meet the routine cash requirements to finance the transactions which a firm carries in the ordinary course of business Cash is hold to pay for the goods or services. It is useful for the conducting our everyday transaction and purchase PRECAUTIONARY MOTIVE The cash balance is hold in the reserve for rando...

SHORT TERM FINANCING/ Funds Short term financing  is business  financing  that you obtain usually for a  term  of one year or less. The  term  is normally six to twenty four months SOURCES  1-       Overdraft 2-       Trade credit 3-       Factoring 4-       Balance of payment 5-       Commercial paper 6-       Treasury bills 7  EXPLANATION 1         An overdraft is an extension of  credit  from a lending institution when an account reaches zero. An overdraft allows the individual to continue withdrawing money even if the account has no funds in it or not enough to cover the withdrawal. Basically, overdraft means that the bank allows customers to borrow a set amount of money 2        A trade credit i...

LONG TERM FINANCING Sources of finance  for business are equity, debt, debentures, retained earnings, term  loans, working capital loans, letter of credit, euro issue, venture  funding  etc. These  sources of funds  are used in different situations. They are classified based on time period, ownership and control, and their  source  of generation. SOURCES   1-       Indenture 2-       Trustee 3-       Bonds 4-       Common and preferred  shareholders   EXPLANATION   Common shareholders -             Common shareholders are the owner of company and as such they have certain rights. They have the right to elect the director of the company. -             In the small firm commo...

BONDS In finance, a  bond  is an instrument of indebtedness of the  bond  issuer to the holders  . Its an    Long term contract .   Generally issued with maturities in the long term of 20 to 30 years and in short terms 7 to 10 years .    Agreement pay interest + principle amount on specific dates .      It is advertised in the newspaper  .  Offered to general public and investors TYPES OF BONDS 1-      Mortgage bond 2-      Debentures 3-      Subordinated debentures 4-      Income bond   A  mortgage bond  is a  bond  secured by a  mortgage  or pool of  mortgages . These  bonds  are typically backed by real estate holdings and real property such as equipment. In a default situation,  mortgage  bondholders have a claim to the underlying property and ...

STOCK EXCHANGE/ MARKET  It’s a market place where the investors can buy and sell the listed companies securities Role of stock market ·          Stock market is an organized market where securities are transacted ·          If the share prices increases its mean the performance of the country is going good and moving towards the develop and prosperity ·          Prices in the stock market fluctuate in every second which took up the eye of the investors ·          The investors are always aware with the price of the share because its necessary to them ·          Stock market promote the habit of the savings ·          Stock market advances the trade commerce and industry which provides opportunities to capital t...