Managing cash and working capital (14-18) Flashcards
What does invoice discounting normally involve?
Selling an individual invoice for cash to a factor organisation at a discount
What is not a possible course of action after the acceptance of a bill of exchange?
Ask customer for immediate payment
What is an acceptance credit?
Bank sells customer instrument to a secondary market at a discount, bank pays bill at face value
What is forfaiting?
Method of providing medium term export finance
What are the forms of short-term finance available to small entities?
- Invoice discounting
- Factoring
- Trade payables
What are the factors that need considering before offering a discount?
- Borrowing on overdraft may be riskier
- Cheaper to finance higher receivables by borrowing or cash discount?
- Other customers might demand the same
- Cash settlement discount may be difficult to withdraw
What are the forms of short-term investments generally available to small entities?
- Negotiable instruments
- Short-term gov bonds
- Interest bearing bank accounts
What are the advantages of bank overdrafts?
- Flexible
- Generally cheaper
What are the disadvantages of bank overdrafts?
- Repayable on demand
- Variable finance cost
What are the advantages of bank loans?
- Fixed finance cost
- Repayment date unknown
What are the disadvantages of bank loans?
- Less flexible
- Generally more expensive
What are 2 indicators of overtrading?
Rapid increase in turnover and current assets
What is the advantages of using an invoice discounting agency over a factoring agency?
Entity retains control over debt collection
What are the 3 types of short-term finance appropriate for an incorporated entity?
- Invoice discounting
- Factoring of receivables
- Credit from suppliers
What are 2 features of factoring?
- Customers may perceive the company as having financial difficulties.
- Cash received from factor can be used immediately
