Chapter 14: Short-term finance and investments Flashcards

1
Q

What are the four main sources of short term financing?

A

Trade payables
Factoring/invoice discounting
Bank overdraft
Financing exports

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2
Q

How can trade payables be used as a source of short term financing?

A

Delaying payments to suppliers

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3
Q

What are the advantages of paying suppliers late?

A

Alleviates cash flow difficulties
Cash can earn a return whilst still in the paying entity’s account

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4
Q

What are the disadvantages of paying supplier late?

A

Loss of settlement discount
Could obtain poor credit rating
Supplier may stop further supplies
Could face legal action

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5
Q

What is factoring?

A

Outsorcing of the credit control department to a third party

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6
Q

What are the three services factors offer?

A

Debt collection
Financing
Credit Insurance

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7
Q

What is invoice discounting?

A

Selected invoices used as security against which the entity may borrow funds

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8
Q

What are the advantages of invoice discounting?

A

Factor does not chase customer directly
May be easier option for a new starter business to raise finance

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9
Q

What are the two main sources of bank lending?

A

Bank overdrafts
Bank loans

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10
Q

What are the methods in place for controlling credit risks of financing exports?

A

Documentary credits
Bills of exchange
Export factoring
Forfaiting

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11
Q

What is a documentary credit?

A

Bank of buyer provides letter of assurance to seller

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12
Q

What is a bill of exchange?

A

Contact/agreement that payment will go out on a date

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13
Q

What is export factoring?

A

Same as debt factoring but overseas

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14
Q

What is forfaiting?

A

Same as export factoring but is used for medium/long term finance.
Forfeiter will buy debt for discount

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15
Q

What are some sources of short term investments?

A

Interest-bearing bank accounts
Negotiable instruments
Short-dated government bonds

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16
Q

What is a bank deposit account?

A

Instant access accounts paying low returns but maximum flexibility of access to the funds

17
Q

What are money market deposits?

A

Deposits through a bank into the financial markets for short-term borrowing and lending. Returns are higher but deposits must remain in account until the maturity date.

18
Q

How do you calculate interest?

A

amount deposited x annualised interest rate x (number of days interest earned/annual day count)

19
Q

What are negotiable instruments?

A

Tradeable bonds/certificates
Easy to buy and sell on public market.

Examples include:
Bank notes
Bearer bonds
Certificates of deposit
Bills of exchange
Treasury bills

20
Q

What are government bonds?

A

Bonds backed by government