Subject: Business Finance

Author: Mr. Ace M. San Gabriel

Editor: Mr. Jhune Michael D. Segismundo
Reviewer: Mr. Mark Paulo Y. Tanjente

WEEK 12
LESSON 7 – SHORT TERM FINANCING MANAGEMENT (part 2)

Description of the Lesson:

Short-term financing options are tied directly to immediate sales; they are relatively easy to qualify
as long as the business has a positive cash flow or outstanding invoices to use as collateral. Cash
flow from operations may not be enough to keep up with growth-related financing needs. Firms may
\ prefer to borrow nor for their inventory or other short-term asset needs rather than wait until they
have saved enough.

Objectives:

At the end of this lesson, the student is expected to do the following:

1. Understand the concept of short-term financing management;
2. define and know the two major short-term spontaneous liabilities; and
3. learn the major sources of unsecured short-term credits and secured short-term

Day 1: Pre-assessment (What I know)

Direction: In your thought, write a short essay about the word ACCRUAL. What is your perception
about it, and how it is applied in a business finance concept? (Write your essay on the answer sheet
provided)
Day 2: Lesson Content (What’s new)
How was activity above? I hope you enjoyed answering it. Before we proceed with our lesson, I want
you to ask yourself the following questions.
1. How a company manages accruals?
2. What are difference between unsecured and secured short-term credit?

Now, let’s start our lesson.

A. Accruals

Accruals are liabilities for services received for which payment has yet to be
made. The most common items accrued by a firm are wages and taxes. Because taxes are
payments to the government, their accrual cannot be manipulated by the firm.
However, the accrual of wages can be manipulated to some extent. This is
accomplished by delaying payment of wages, thereby receiving an interest-free loan from
employees who are paid sometime after they have performed the work.
Sources of short-term credits:
1. Unsecured credit consists of all those sources that have as their security only
the lenders’ trust and confidence on the ability of the borrower to repay the
funds when due. It is short-term financing obtained without pledging specific

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 assets as collateral. The firm should take advantage of these “interest-free”
sources of unsecured short-term financing whenever possible.

2. Secured funds include additional security in the form of assets that are
pledged as collateral in the event the borrower defaults in payment of
principal and interest.

Three (3) major sources of Unsecured Short-Term Credit:

i. Trade credit – Trade credit provides one of the most flexible sources of
financing available to the firm. The firm just places an order with one of its
suppliers. The supplier then makes some credit investigation and if the credit is
good, the supplier sends the goods or renders services. The cost of this credit is
usually measured in the discounts allowed and depends whether the firm takes the
discount or not.

Example: If 2/10, net 30 was the term of payment, the buyer has 10 days to take a
2% discount. If it is not taken, the full price must be paid within 30 days.
ii. Commercial bank loans - Commercial banks have traditionally offered savings
(time deposit) and checking accounts and served as lenders for a variety of
purposes. One of which is the offering of unsecured short-term credit, the lines of
credit and transaction loans (notes payable), maturities of which are both not more
than one year. Interest rates are highly dependent on the credit worthiness of the
borrower and the level of interest rates in the economy as a whole.

iii. Commercial paper - Commercial paper consists of short-term, unsecured, notes

payable issued in large denominations by large companies with high credit ratings
to other companies and institutional investors, such as pension funds, banks, and
insurance companies. The maturity date of commercial paper is normally less than
270 days. Commercial paper is traded in money markets and thus is highly liquid.
Only the largest and most creditworthy companies are able to use commercial
paper, which consists of unsecured promissory notes sold in the money market.

Secured Short-Term Credit

Secured sources of short-term credit have certain assets of the firm, such as
accounts receivable or inventories, pledged as collateral to secure a loan. In case of
default of the loan agreement, the lender has first claim to the pledged assets.
Two main current assets which are used as collateral for short-term credits are the
accounts receivables and inventories.
For Accounts Receivables:
1. Pledging – under this arrangement, the amount of the loan is stated as a
percentage of the face value of the receivables pledged.
2. Factoring – involves the outright sale of accounts receivable to a factor.
For Inventories:
1. Floating lien agreement - the borrower gives the lender a lien against all
its inventories.
2. Chattel mortgage agreement - it involves having specific items of
inventory identified in the security agreement.

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 3. Field warehouse financing agreement - it means that the inventories
used as collateral are physically separated from the firm’s other
inventories and are placed under the control of a third-party field
warehousing firm.

Day 2:
Application (What I Can Do)
Instruction: On your answer sheet, fill in the blanks to complete the statement.

Accruals are ______________________ for services ______________________ for which

payment has _______ to be made. The most common items accrued by a firm are wages and taxes.
Because taxes are payments to the government, their accrual ___________ be manipulated by the firm.

However, the accrual of wages ______________________ be manipulated to some extent. This

is accomplished by delaying payment of wages, thereby receiving an interest-free loan from employees
who are paid sometime after they have performed the work.

Day 3:
Valuing/Integration (What’s More)

Instruction: On your answer sheet, enumerate the following:

Three (3) major sources of Unsecured Short-Term Credit:
1. __________________________________________________________________
2. __________________________________________________________________
3. __________________________________________________________________

Post-Assessment (What I Have Learned)

Instruction: In your thoughts, write a short explanation about the concept of accrual accounting versus
cash accounting. Please write your essay on the answer sheet provided and follow the KISS method
(Keep It Short and Simple)

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 Subject: Business Finance
Instructor: Mr. Ace M. San Gabriel
Student’s Name: ___________________________________________________
Course and Section: ________________________________________________

WEEK 11
LESSON 6 – BARANGAY MICRO BUSINESS ENTERPRISE (BMBEs)

Answer Sheet

Day 1: Pre-assessment (What I know)

Direction: In your thought, write a short essay about the word ACCRUAL. What is your perception
about it, and how it is applied in a business finance concept? (Write your essay on the answer sheet
provided)

Day 3:
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Application (What I Can Do)
Instruction: On your answer sheet, fill in the blanks to complete the statement.

These liabilities are called ______________________because they arise from changes in sales

activity, which are not directly controlled by the firm. A growth in sales is accompanied by a rise in cost

of goods sold (COGS) if the company is a product manufacturer or ______________________ in cost

of sales (COS) if the company provides services. The upturn in COGS or COS is due to

______________________ production and labor activity to replace sold inventory or support additional

service sales. ______________________ payable (for raw material and parts),

______________________ payable (for additional worker hours) and taxes payable (for greater pre-tax

income) spontaneously climb as a result.

Valuing/Integration (What’s More)

Instruction: On your answer sheet, enumerate the following:

Three (3) major sources of Unsecured Short-Term Credit:
1. __________________________________________________________________

2. __________________________________________________________________

3. __________________________________________________________________

Post-Assessment (What I Have Learned)

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 Instruction: In your thoughts, write a short explanation about the concept of accrual accounting versus
cash accounting. Please write your essay on the answer sheet provided and follow the KISS method
(Keep It Short and Simple)

REMINDERS:

Things to remember as you accomplish this module:

1. Keep this module and notes inside your portfolio.
2. If there are any questions or clarifications, kindly send me a message through the
following:
 Call/text –09088143178
 Messenger – RCI Ace San Gabriel

Source: Financial Management (Book) by Payongayong, Luzviminda S., et.al.

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