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• Module overview
• 1. Introduction to budgets
  • 1.1 Introduction to the Budget Process
  • 1.2 Budget types
    • 1.2.1 The Budget Guidelines
    • 1.2.2 The Sales Budget
    • 1.2.3 Budget for Operating Expenses
    • 1.2.4 Profit Budget
    • 1.2.5 Cash-Flow Budget
    • 1.2.6 The Financial Position Budget
    • 1.2.7 Additional Types of Budgets
    • 1.2.8 Additional Budgeting Techniques
  • 1.3 The budget process and its objectives
  • 1.4 Budgets for performance management
    • 1.4.1 Master budget

• 2. Planning the budget

  • 2.1 Planning the Budget
    • 2.1.1 Business income
    • 2.1.2 Visual representation of sales and budgets
    • 2.1.3 The break-even point
    • 2.1.4 Contribution margin

• 3. Controlling the budget

  • 3.1 Controlling budgets
    • 3.1.1 Variance analysis
    • 3.1.2 Taking action to achieve the objectives of the budget
    • 3.1.3 Resource acquisition and usage

• 4. Introduction to Financial Management

  • 4.1 Business Objectives
    • 4.1.1 Maximising profit
    • 4.1.2 Maximising wealth
  • 4.2 Ethics and conflicts in business
    • 4.2.1 The dilemma of ethics in finance, investment and accounting
  • 4.3 Financial Managers
    • 4.3.1 Financial information and objectives
    • 4.3.2 Accounting, the financial information system
  • 4.4 The finance function
    • 4.4.1 Business and financial calculations

• 5. Elements of Business and Financial Management

  • 5.1 Business Structures
    • 5.1.1 Sole proprietors
    • 5.1.2 Partnerships
    • 5.1.3 Corporations and companies
  • 5.2 Reporting financial data and information
  • 5.3 Financial reports
    • 5.3.1 Statement of financial performance (profit and loss statement)
  • 5.4 Capital Markets
    • 5.4.1 Capital Markets
  • 5.5 Regulation and financial institutions
    • 5.5.1 Interest rates, supply and demand and market efficiency
  • 5.6 An overview of taxation implications

• 6. Obtaining Funds: Sources of Long Term and Short Term Finance

  • 6.1 Finance from external sources
    • 6.1.1 Equity finance
  • 6.2 Debt
  • 6.3 Long-term debt
    • 6.3.1 Debentures and unsecured notes (bonds)
    • 6.3.2 Mortgage loans
  • 6.4 Hybrids of debt and equity
  • 6.5 Leasing
    • 6.5.1 Operating Lease
    • 6.5.2 Financial Lease
    • 6.5.3 Distinguishing between an operating lease and a financial lease
    • 6.5.4 Sale and Leaseback
    • 6.5.5 The issue of gearing
  • 6.6 Short-term debt
    • 6.6.1 Bank Overdrafts
    • 6.6.2 Fully drawn advance
  • 6.7 Retained Earnings, internal funds and depreciation

• 7. Managing Working Capital

  • 7.1 Managing current assets and current liabilities
    • 7.1.1 Appropriate level of working capital
  • 7.2 Managing inventories
    • 7.2.1 Reasons for holding inventories
    • 7.2.2 The economic order quantity (EOQ)
    • 7.2.3 Re-order point (ROP)
    • 7.3.4 Safety stock (SS)
    • 7.2.5 Quantity discounts
  • 7.3 Managing trade debtors (accounts receivable)
    • 7.3.1 Credit policies
    • 7.3.2 Collection period
    • 7.3.3 Managing cash and near-cash assets
    • 7.3.4 Managing trade creditors (accounts payable)

• 8. Job Costing

  • 8.1 Accounting information about product, service and project costs
    • 8.1.1 Full costing
    • 8.1.2 Single product/service line
    • 8.1.3 Multi product/service
    • 8.1.4 Direct and indirect costs
  • 8.2 How costs behave
    • 8.2.1 Allocating Overheads
  • 8.4 Cost drivers
    • 8.4.1 ABC and the service industry
  • 8.5 Conclusion

6.6.2 Fully drawn advance

Fully drawn advances are loans used as medium to long-term finance. They are usually fixed term loans covering a period from 3 - 10 years. Trading banks offer them as an alternative to overdrafts.

The loan is fully drawn at time of approval and requires the borrower to make regular repayments, which represent payment of principal and interest.

Inter-company loans

These loans represent direct lending (usually unsecured) and borrowing between companies. The inter-company market is the oldest of Australia 's present money markets dating back to the early 1950s. It consists of financial institutions and reputable trading companies lending surplus cash to each other on a short-term basis. As these loans are mostly unsecured only companies with a very high credit rating (mainly 'blue chip' companies) can raise funds in this market.

Trade Credit

A company that buys goods and services on credit incurrs a debt called accounts payable or creditors . The term of the debt depends on the trading arrangements between buyer and seller and can be from as little as 7 days, ranging through 30 days, 60 days or any other time frame that the parties agree (think of some of the payment and 'interest free' periods advertised to retail customers in the newspapers and sales catalogues).

Trade credit is short-term finance that is interest free, easy to obtain with a good credit rating and geared to the needs of the firm. It fluctuates in total in line with variations in trading operations of the firm (the trading cycle) subject to an upper credit limit. The credit providers can speed up payment by offering a discount for prompt settlement (a settlement discount).

As an example, terms may be expressed as 2/10 or net 30 , which means 2% discount is taken if the debt is paid in 10 days, otherwise the full amount is payable within 30 days. If the purchaser does not pay in the discount period it incurs an opportunity cost (the discount forgone ) .

Alternatively, stretching the payment of accounts beyond the normal credit period offered by suppliers can be costly. The costs include a deteriorating credit rating as well as lost discounts.

Trade credit is an important source of finance and, on average funds approximately 8% of total current assets and services compared to 1% funded by bank overdrafts.

Factoring Accounts Receivable

Many businesses sell goods and services on credit, and accounts receivable (debtors) is often a large current asset representing uncollected sales. Businesses holding large receivables are forgoing cash and meeting considerable costs of administering the debts (credit control, preparing and mailing monthly statements and collecting bad debts).

A short-term finance option is debt factoring , which is to sell the debts for cash to a financial institution, called a factor , in order to:

• Get cash as soon as the sales take place
• Raise cash to finance trading operations and for other purposes
• Reduce the costs of credit control, collection expenses and bad debts

Title to the receivables passes to the factor. Factoring can be with recourse , which means that the company is responsible for any bad debts and must refund the factor for cash previously received. It can also be without recourse where the factor absorbs the bad debt loss. As part of a factoring agreement the factor assumes responsibility for the company's credit control, accounts receivable administration and collections from debtors.

A disadvantage of factoring is that it can be expensive and the factor can make a service charge (commission) of between 1%-4% of the face value of the receivables.

Most companies now allow customers to buy using credit cards. Effectively, this means that credit card companies such as American Express and Diners card and financial institutions that issue MasterCard and Visa Card are specialising in the collection of accounts receivable. Again this can be expensive for the company selling the goods and services.

As an alternative to factoring a company may choose to borrow using its accounts receivable as collateral (something of value acceptable to a lender as security for a loan). This is called invoice discounting . In this way the company retains title to, and normal control over, its accounts receivable. Both the accounts receivable and the loan payable appear on the performance statement as a current asset and a current liability respectively.

Commercial Bills and Promissory Notes

Commercial bills of exchange (sometimes called 'notes payable') are another short-term financing option. Two types of commercial bills are traded on the commercial bills market: trade bills and accommodation bills. Both may be discounted and traded in the same way.

A trade bill arises when a supplier sells goods on credit to a company (the debtor) and prepares a document (draws a bill) that the debtor must sign (accept). Effectively an account payable is being converted into a bill payable . By signing, the debtor accepts the obligation to pay a certain amount on a certain date. This gives the credit grantor a written document, a bill, that can be used to prove the debt if it is not paid on the due date.

Another advantage for the credit grantor is that this bill receivable can be negotiated on to a third-party, often a bank (bills are negotiable instruments), which will hand over cash in return for a discount. Bills from normal merchandising transactions are now rare.

An accommodation bill is different in that it is drawn to borrow money, and is evidence to the lender of the amount lent, the repayment date and the interest to be received. The bill is drawn to get finance from a bank (a bank bill) or from an entity specialising in bill finance (a finance bill).

Example

ABC Company wants to borrow $100 000 by means of a 180-day bill of exchange, with the accommodation of the bill provided by NorthTas Bank. ABC Company will draw up a draft bill and present this to the bank for acceptance. When the bank accepts the bill (effectively granting credit to the company) the Company has a credit instrument that it can sell to another entity for its face value less a discounting fee. When the bill matures, ABC Company pays the full face value to the bank, which in turn will cancel the debt or pay the entity that holds it and presents it for payment (this is not as complicated as it sounds!).

Text reading

Atrill, Mclaney, Harvey & Jenner, pages 449-451

Do Activity 13.7.

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