Financial management consist of all those activities that are concerned
with obtaining money and using it effectively. Effective financial
management involves careful planning. It begins with a determination of the
firm's financial needs.
Money is needed to start a business. Then the income from sales could be
used to finance the firm's continuing operations and to provide a profit.
But sales revenue does not generally flow evenly. Income and expenses may
very from season to season or from year to year. Temporary financing may be
needed when expenses are high or income is low. Then, the need to purchase
a new facility or expand an existing facility may require more money than
is available within a firm. In these cases the firm must look for outside
sources of financing. Usually it is short- or long-term financing.
1. Short-term financing is money that will be used for one year or less
and then repaid.
There are many short-term financing needs. Two deserve special attention.
First, certain necessary business practices may affect a firm's cashflow
and create a need for short-term financing.
Cashflow is the movement of money into and out of an organization. The
ideal is to have sufficient money coming into the firm, in any period, to
cover the firm's expenses during that period. But the ideal is not always
achieved. For example, a firm that offers credit to its customers may find
an imbalance in its cash flow. Such credit purchases are generally not paid
until thirty or sixty days (or more) after the transaction. Short-term
financing is then
[pic]
needed to pay the firm's bills until customers have paid their bills.
Unanticipated expenses may also cause a cash-flow problem.
A second major need for short-term financing that is related to a
firm's cash-flow problem is inventory.
Inventory requires considerable investment for most manufactures,
wholesalers, and retailers. Moreover, most goods are manufactured four to
nine months before they are sold to the ultimate customer. As a result,
manufacturers often need short-term financing. The borrowed money is used
to buy materials and supplies, to pay wages and rent, and to cover
inventory costs until the goods are sold. Then, the money is repaid out of
sales revenue. Additionally, wholesalers and retailers may need short-term
financing to build up their inventories before peak selling periods.
Again, the money is repaid when the merchandise is sold.
2. Long-term financing is money that will be used for longer period
than one year. Long-term financing is needed to start a new business. It
is also needed for executing business expansions and mergers, for
developing and marketing new products, and for replacing equipment that
becomes obsolete or inefficient.
The amounts of long-term financing needed by large firms can be very
great.
[pic]
[pic]
Exercises
I. Translate into Russian.
Income; profit; facility; sales revenue; expense; source; term; short-
term financing; long-term financing; cash; cash flow; expand; provide;
obtain; purchase; affect; be available; repay; borrow; transaction;
supplies; marketing; equipment; merger; retailer; wholesaler; manufacturer;
imbalance; merchandise; inventory; rent; sales revenue.
II. Find the English equivalents.
Финансовые потребности; арендная плата; стоимость; изготовитель; оптовый
торговец; розничный торговец; (торговая) сделка; доход от продажи; припасы;
товары; слияние (предприятий); определение; товарные запасы; оборудование;
продажа; доход; прибыль; расход; срок; краткосрочное финансирование;
долгосрочное финансирование; денежная наличность; движение наличности;
обеспечивать; изменяться; покупать; быть в наличии; предлагать; заменять;
влиять (на); конечный; устарелый; неэффективный; непредвиденный;
тщательный.
III. Fill in the blanks.
1. Financial management begins with a determination of the firm's... .
2. Temporary financing may be needed when ... are high and ... is low.
3. In these cases the firm must look for outside ... of financing.
4. Short-term financing is ... that will be used for one year or less and
then ....
5. Cash flow is the movement of ... into and out of an organization.
6. A firm that offers credit to its customers may find an imbalance in its
... .
7. A second major need for ... financing that is related to a firm's cash-
flow problem is ... .
8. The borrowed money is used to buy ... and ... , to pay ... and to cover
... until the goods are sold.
IV. Translate into English.
1. Финансовый менеджмент состоит из тех видов деятельности (activities),
которые относятся к получению денег и эффективному их использованию.
2. Краткосрочное финансирование — это деньги, которые будут использоваться
в течение одного года или менее (less).
3. Существуют (there are) многие потребности краткосрочного финансирования,
но движение наличности и товарные запасы представляют (are) две основные
проблемы.
4. Товарные запасы требуют значительного инвестирования для большинства
производителей, оптовых торговцев и розничных торговцев.
5. Занятые деньги возвращаются (is repaid) из дохода от продаж.
V.. Answer the questions.
1. Is money needed to start a business?
2. When may temporary financing be needed?
3. What kinds (виды) of financing do you know?
4. What is short-term financing?
5. What is cash flow?
6. What is the ideal cash flow?
7. What can cause a cash flow problem?
8. Does inventory require considerable investment for most manufacturers,
wholesalers and retailers?
9. Why do manufacturers often need short-term financing?
10. For what purpose (цель) is the borrowed money often used by the
manufacturers?
11. When is the borrowed money usually repaid?
12. What is long-term financing? , .:
13. For what purpose is long-term financing needed?
14. Are the amounts of long-term financing greater than those of short-term
financing?
VI. Make up a written abstract of the above text.
VII. Retell the prepared abstract.
Unit 6
Sources of Unsecured Financing
Unsecured financing is financing for which collateral is not required.
Most short-term financing is unsecured. Sources of unsecured short-term
financing include trade credits, promissory notes, bank loans, commercial
papers, and commercial drafts.
1. TRADE CREDIT
Wholesalers may provide financial aid to retailers by allowing them
thirty to sixty days (or more) in which to pay for merchandise. This
delayed payment, which may also be granted by manufacturers, is a form of
credit known as trade credit or the open account. More specifically, trade
credit is a payment delay that a supplier grants to its customers.
Between 80 and 90 percent of all transactions between businesses involve
some trade credit. Typically, the purchased goods are delivered along with
a bill (or invoice) that states the credit terms. If the amount is paid on
time, no interest is generally charged. In fact, the seller may offer a
cash discount to encour-. age prompt payment. The terms of a cash discount
are specified on the invoice.
2. PROMISSORY NOTES ISSUED TO SUPPLIERS
A promissory note is a written pledge by a borrower to pay a certain sum
of money to a creditor at a specified future date. Unlike trade credit,
however, promissory notes usually require the borrower to pay interest.
Although repayment periods may extend to one year, most promissory notes
specify 60 to 180 days. The customer buying on credit is called the maker
and is the party that
issues the note. The business selling the merchandise on credit is called
the payee.
A promissory note offers two important advantages to the firm extending
the credit. First, a promissory note are negotiable instruments that can be
sold when the money is needed immediately.
3. UNSECURED BANK LOANS
Commercial banks offer unsecured short-term loans to their customers at
interest rates that vary with each borrower's credit rating. The prime
interest rate (sometimes called the preference rate) is the lowest rate
charged by a bank for a short-term loan. This lowest rate is generally
reserved for large corporations with excellent credit ratings.
Organizations with good to high credit ratings may have to pay the prime
rate plus 4 percent. Of course, if the banker feels loan repayment may be a
problem, the borrower's loan application may be rejected.
Banks generally offer short-term loans through promissory notes.
Promissory notes that are written to banks are similar to those discussed
in the last section.
4. COMMERCIAL PAPER
A commercial paper is a short-term promissory note issued by a large
corporations. A commercial paper is secured only by the reputation of the
issuing firm; no collateral is involved. It is usually issued in large
denominations, ranging from $5,000 to $100,000. Corporations issuing
commercial papers pay interest rates slightly below those charged by
commercial banks. Thus, issuing a commercial paper is cheaper than getting
short-term financing from a bank.
Large firms with excellent credit reputations can quickly raise large
sums of money. They may issue commercial paper totaling millions of
dollars. However, a commercial paper is not without risks. If the issuing
corporation later has severe financing problems, it may not be able to
repay the promised amounts.
