Short term finance and investments

Question 1

What are the advantages/disadvantages of trade payables?

Answer 1

Adv - easy to arrange, very common

Dis - late payment can result in supply stops and increased prices

Question 2

What are the advantages/disadvantages of factoring/invoice discounting?

Answer 2

Adv - cost saving, receive money earlier so don’t have to use an overdraft

Dis - expensive, according to Kaplan??!! Customer perception as they know we have had to use a factor. Invoice discounting avoids this as the customer is unaware that we have discounted the debt

Question 3

What are the adv/disadvantages of an overdraft?

Answer 3

Adv - very flexible and unsecured

Dis - expensive, rate of interest higher than short term loan. Repayable on demand

Question 4

What are the 4 main ways of financing exports?

Answer 4

LC
Bill of exchange
Export Factoring
Forfaiting

Question 5

Describe how forfaiting works?

Answer 5

Typically used for capital goods and allows the importer to spread payments over a number of years. Normally pay some of the cost on delivery and the rest over a number of years. Importer normally issues a number of promissory notes agreeing to pay a certain amount on certain dates over the years. The importer must then find a bank who is willing to guarantee the promissory notes. These notes can be sold as a discount. The exporter then receives immediate payment from the forfaiting bank, for the notes it has purchased. The bank holds on to the notes till maturity and then presents them to the importer for payment. The importer receives a period of finance for most of the purchase price, the exporter receives early payment and the bank bears the credit risk.

Question 6

What are the criteria a business should consider when looking at a short term investment?

Answer 6

Maturity - how long?
Return - how much?
Risk - what could we lose?
Liquidity - how easy is it to turn the investment back into cash?

Diversification - how spread is the risk?

Question 7

What are the 4 types of investment a business might consider for a short term investment?

Answer 7

Interest bearing accounts

Negotiable instruments

Short dated government bonds

Other (corporate bonds & commercial paper)

Question 8

What is the formula for calculating the discount on a treasury bill?

Answer 8

D = R x F x T/Y

where;
R = % yield
F = face value
T = length of time issued, number of days
Y = number of days in year for interest purposes

Simply then subtract the discounted value from the face value of the bill