BEC Unit 2 Module 5 Flashcards
Factoring
Turning over the collection of AR in exchange for a discounted short-term loan.
Concentration Banking
Single bank as a central depository.
Benefits: Improved controls over inflows and outflows, Reduced idle balances, improved effectiveness for investments
Finance Temporary Assets with Short-Term Debt?
Matching the maturities of current assets as they come due is designed to ensure liquidity and reduce risk
Float
Difference between the balance of checks outstanding . which have not cleared the bank and deposits made but which have not yet cleared the bank here
Lockbox System
Accelerates collection of AR
AR Turnover
Sales (net) / Average AR (net)
Days Sales in AR
{Ending AR (net) / Sales (net)} x # of days in period
Average Collection Period Decreased
- Increase in sales
- Increase in discounts taken
- Decrease in amount of bad debt
- Decrease in investment in AR
Debt Covenants
Protect borrower’s credit rating thus reduces the cost of borrowing
Letter of Credit
Third-party, generally by a bank.
- -Lowers cost of borrowing
- -External credit enhancement
Line of Credit
Bank loan up to a specific maximum dollar amount for a defined term
Short-term Financing
Rates are usually lower than long-term rates
- -Require current asset levels to be sufficient
- -Advantages: Increased profitability and decreased financing cost
- -Disadvantages: Not locking in LT rate, increased interest rate risk, decreased capital availability
Long-term Financing
Rates are usually higher than short-term rates
- -Current assets and risk tolerance of management must be sufficient
- -Increases financial leverage
- -Advantages: Lock in LT rate, decreased interest rate risk, increased capital availability
- -Disadvantages: Decreased profitability, and increased financing costs
