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Working Capital and Sources of Short-Term Fund


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Published in: Economy & Finance

Working Capital and Sources of Short-Term Fund

  1. 1. By Group 4
  2. 2. FINANCING POLICY OF A FIRM <ul><li>The financing policy for a firm’s working capital or current assets involves the determination of how these current assets should be financed well as temporary or seasonal requirements as sales increases. </li></ul><ul><li>As the firms operate at higher levels of sales, it requires more inventories and cash for its operations </li></ul>
  3. 3. What is working capital? It measures the funds that are readily available to operate a business. Working capital = Current assets - Current liabilities It is vital for a company to have sufficient working capital to meet all its requirements.  The faster a business expands, the greater will be its working capital needs. Why is it important?
  4. 4. Sales and Working Capital of San Miguel Corporation ‘92-’95 ₱
  5. 5. The working capital financing strategies of a firm may be categorized as follows:
  6. 6. <ul><li>Conservative Approach </li></ul><ul><li>the firm finances all of the permanent working capital requirements as well as part of the temporary working capital requirement through long-term financing. </li></ul>
  7. 7. <ul><li>Maturity Matching Approach </li></ul><ul><li>involves the use of long-term debts and equity to finance all of the permanent working capital and uses short-term debts to finance all of the short-term working capital requirements. </li></ul>
  8. 8. <ul><li>Aggressive Approach </li></ul><ul><li>because it involves the use of short-term funds to finance a portion of permanent working capital requirements. </li></ul>
  9. 9. How Do Philippine Firms Finance Working Capital? <ul><li>Working capital financing in small and medium enterprises is normally needed to bridge the gap between suppliers’ credit terms and the firms’ working capital cycle. </li></ul><ul><li>Loan financing of some firms was provided by the Development Bank of the Philippines (DBP) . DBP normally provides working capital loans at very favourable terms to small and medium-si </li></ul><ul><li>zed firms that avail of longer-term loans for capital expenditure from DBP. </li></ul><ul><li>If  working capital is tight , consider  other ways of financing capital investment , such as loans, fresh equity, or leasing. </li></ul>
  10. 10. Working Capital Cycle
  11. 11. <ul><li>Commercial banks provide short-term financing for working capital requirements of firms. The loan facilities range from straight term loans to credit lines for various purposes. </li></ul>Short-Term Bank Loans
  12. 12. Interest Rates Interest rates for bank loans are influenced by benchmark rates in capital markets such as Manila Reference Rates, Treasury bill rates and the bank’s own cost of funds. E.g. the interest rates they pay on savings and time deposits and the reserved requirements.
  13. 13. Short-Term Loans Granted By Philippine Commercial Banks <ul><li>Loans - Payable on a fixed date or within a specified period of time for which interest is not collected in advance or discounted from the face value of promissory note. </li></ul><ul><li>Credit Line - A type of accommodation wherein the bank makes funds available to the client up to a specified amount during the year. Draw downs are made via 30-180 day promissory notes. </li></ul><ul><li>Loans to Importers/Exporters (LCTR Line) </li></ul><ul><li>A credit line extended to importers to facilitate the opening for sign letters of credit </li></ul>
  14. 14. One-shot foreign exchange LC - This is similar to LCTR line but may be availed only once. Domestic LC – Same as LCTR line but applies to domestic transactions. Export Packing Credit Line – Advance payment to an exporting firm in order for it to undertake processing and packaging. BPL (Bills purchased line) Omnibus Line Standby Letter of Credit (Domestic) Demand Loan Money Market Line
  15. 15. This chapter has two parts: working capital policy and sources of short-term funds. Working capital policy is concerned with the manner in which the firm’s current assets or working capital should be financed. Working capital consists of a permanent components as well as seasonal or temporary requirements. In financing working capital, three financing strategies or approaches were discussed: a) the conservative approach, b) the maturity matching approach, and c) the aggressive approach. The Second Part of the chapter identified some sources of short-term funds , namely: a) bank loans, b) commercial paper issues, c) trade financing, and d) receivable factoring. Summary