Managerial finance -- Chapter 15 -- summary

Current liabilities represent an important and generally inexpensive source of financing for a firm. The level of short-term (current liabilities) financing employed by a firm affects its probability and risk. Accounts payable are on inexpensive, spontaneous source of short-term financing. They should be paid as late as possible without damaging the firm's credit rating. This strategy will shorten the firm's cash conversion cycle and reduce its investment in operations. If vendors offer cash discounts, the firm must consider the economics of giving up versus taking the discount. Accruals, another spontaneous liability, should be maximized because they represent free financing. Notes payable, which represent negotiated short-term financing, can be obtained from banks on a unsecured basis. They should be obtained at the lowest cost under the best possible terms. Large, well-known firms can obtain unsecured short-term financing through the sale of commercial paper. On a secured basis, the firm can obtain loans from banks or commercial finance companies, using either accounts receivable or inventory as collateral.

The financial manager must obtain the right quantity and form of current liabilities financing so as to provide the lowest cost funds with the least risk. Such a strategy should positively contribute to the firm's goal of maximizing the stock price.

The major spontaneous source of short-term financing is accounts payable, which result from credit purchases of merchandise. They are the primary source of short-term funds. Credit terms may differ with respect to the credit., cash discount, cash discoun period, and beginning of credit period. Cash discounts should be given up only when a firm in need of short-term funds must pay an interest rate on borrowing that is greater then the cost of giving up the cash discount.

Stretching accounts payable
Stretching accounts payable can lower the cost of giving up a cash discount. Accruals, which result primarily from wage and tax obligations, are virtually free.

Interest rates
Banks of the major source of unsecured short-term loans to businesses. The interest rate on those loans is applied to the primary of interest by a risk premium and may be fixed or floating. It should be evaluated by using the effective annual rate. Whether interest is paid when the load lecturers or in advance affects the right. Bank loans may take the form of a single payment note, a line of credit, or a revolving credit agreement.

Commercial paper
Commercial paper is on unsecured IOU issued by firms with high credit standing. International sales and purchases expose firms to exchange rate risk. Such transactions are larger and of longer maturity than domestic transactions, and they can be financed by using a letter of credit, by borrowing and the local market, or through dollar denominated linens from international banks. On transactions between subsidiaries, "netting" can be used to minimize foreign exchange fees and other transaction costs.

Secured short-term loans
Secured short-term lines are those for which the lender requires collateral -- typically, current assets such as accounts receivable or inventory. Only a percentage of the book value of acceptable collateral is advanced by the lender. These loans are more expensive than unsecured loans. Commercial banks and commercial finance companies make secured short-term loans. Both pledging and factoring involved the use of accounts receivable to obtain needed short-term funds.

Inventory
Inventory can be used as short-term loan collateral under a floating lien, a trust receipt arrangement, or a warehouse receipt loan.