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PRESENTATION ON SOURCES OF FINANCE (DOMESTIC & F0REIGN) & RECEIVABLE MANAGEMENT

GROUP MEMBERS
PRIYA LOTANKAR LAXMIKANT NANDAPURKAR RANUKA NAWATHEY PRASHANT NEHETE GURUDATT RAO MANSI RAUT AMAR SHELAR 28 31 32 33 39 40 46
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SOURCES OF FINANCE

Short Term (Domestic)

Long Term (Domestic)

Foreign

SHORT TERM FINANCE


(DOMESTIC)
(WORKING CAPITAL REQUIREMENTS)

COMMERCIAL PAPER
Short term unsecured promissory notes issued by reputed firms with high credit rating. Maturity period is very short i.e. 3 to 6 months. Sold at a discount from face value and redeemed at face value. Denominations of each commercial paper is in multiples of 5 lakhs.

TREASURY BILLS
Risk-free, short-term, very liquid instruments that are issued by the central bank of a country. Maturity period for T-bills ranges from 3-12 months. (91-days, 182 days and 364 days) T-bills are usually issued at a discount to the face value and the investor gets the face value upon maturity.

CERTIFICATES OF DEPOSIT
Term deposit with a bank with a specified interest rate Scheduled banks can issue CDs with maturity ranging from 7 days 1 year Financial institutions can issue CDs with maturity ranging from 1 year 3 years. CD are issued for denominations of Rs. 1,00,000 and in multiples 6 thereof.

INTER CORPORATE DEPOSITS


A deposit made by one company with another, normally for a period up to six months, is referred to as inter corporate deposit. such deposits are usually of 3 types: 1. 2. Call deposits: A call deposit is withdrawable by the lender on giving a days notice. Interest provided is 16% Three months deposit: These are more popular in practice.Deposits are generally considered by the borrowers to solve problems of short-term capital inadequacy like tax payment, excessive raw material import, breakdown in production, payment of dividends, delay in collection, and excessive expenditure of capital. annual rate of interest given for three month deposits is 12%.
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Six months deposit: normally lending companies do not extend deposits beyond this time frame. interest rate carried is of around 15% p.a.

CASH CREDIT
Customer is allowed and advance up to certain limit against credit granted by the bank. A customer can only draw to the extent of his requirement and deposit his surplus funds in his account. Interest is charged only on the amount availed by the customer. Cash credit limits are sanctioned against the security of goods by way of pledge or hypothecation(movable property, e.g. Inventory).
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OVERDRAFT
Similar to the cash credit arrangement. Customer is permitted to overdraw up to prefixed limit. Interest is charged on the amount overdrawn subject to some charge in the case of cash or credit arrangements. Overdraft accounts operate against security in the form of pledging of share security, assignment of the LIC policy and sometimes even mortgage of fixed asset
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BILL DISCOUNTING
Borrower can obtain credits from the bank against the bill. The amount provided under this system is covered within the overall cash credit or overdraft limit. Credit worthiness of the drawer is checked, before purchasing or discounting the bill. The term Bills Payable implies that the bank becomes the owner of the bills but in practice the bank holds bills as security for the credit. A bill discounted, the borrower is paid discounted amount of bill. A bank collects full amount on maturity.
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LETTER OF CREDIT
Foreign supplier insists that the buyer should ensure that his bank would make the payment if he fails to honor his obligation. That is ensured by (LC) arrangement. Bank opens LC in favor of a customer to facilitate his purchase of goods If customer doesn t pay in the credit limit, the customers bank makes the payment under the LC arrangements. This arrangement passes the risk of supplier of the bank. Bank charges amount for opening LC. Banks will extend such facilities to the financially sound customers.

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FACTORING
Accounts receivables are generally sold to the financial institution (factor) who charges commission and bears the credit risk associated with the accounts receivable purchased by it. a) Advantages to firms: The firm can convert accounts receivables into cash without bothering about repayment. b) c) It ensures a definite pattern of cash inflows. Continuous factoring virtually eliminates the need for credit department.

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PUBLIC DEPOSITS
Important source of short-term and medium-term finances. Period of six months to three years. They are unsecured loans taken from public; they should not be used for acquiring fixed assets since they are to be repaid within a period of 3 years. These are mainly used to finance working capital

requirements.

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TRADE CREDIT
Given by Supplier of goods

Trade Credit Period: Approx. 15 to 90 days

RESERVES AND SURPLUS


Accumulation of profits of the company to finance its development activities or repay loans.

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LONG TERM FINANCE


(DOMESTIC)

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EQUITY CAPITAL
Sec. 2(46) of Companies act A share is the share in the share capital of company Equity Capital holder are part-owners of company Total equity capital of a company is divided into equal units of small denominations Payment of dividend is not compulsory, hence the company may choose to retain profit.
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DEBENTURES
It is a security issued by company against debt Debenture holders are creditor of the company Borrower has to pay interest and principal at specified times. Interest on debentures is deductible for the company at tax filing.
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DEBENTURES

Redeemable Or Irredeemable

Convertible Or Non-Convertible

Secured Or Unsecured

Bearer Or Registered

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PREFERENCE SHARES
It is a hybrid form of financing i.e. Some characteristics of equity and Debentures Enjoy Priorities in the payment of dividend & in repayment of capital. Dividend rate is fixed Preference dividend is not a tax-deductible payment Do not enjoy voting rights
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PREFERNCE SHARES

Participating or Non-participating

Redeemable Or Irredeemable

Cumulative Or Non-cumulative

Convertible Or Non-Convertible

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TERM LOAN/TERM FINANCE


Medium and long term loans are known as Term Loans, represents Dent Finance Features: a) FI And Banks give rupee as well as Foreign currency loans b) c) Collateral security is given by company Term Loan period range between 10 to 25 yrs.

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VENTURE CAPITAL
Money provided by investors to start up firms and small businesses Venture capital typically comes from institutional investors and high net worth individuals and is pooled together by dedicated investment firms High Degree Of risk involved with expectation of high rate of returns
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DIFFERENT BONDS
Deep Discount Bond Zero Coupon Bond Government Bonds Private/Corporate Bond

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FOREIGN SOURCE OF FINANCE

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EXTERNAL COMMERCIAL BORROWING(ECB)


Borrowing or loans taken by a domestic companies from international financial institutions Major source of funds in the infrastructure sector Interest rates are LIBOR linked

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AMERICAN DEPOSITORY RECEIPT (ADR)


I. Any non-US company wants to raise capital from US stock exchange, issued ADR II. ADR listed of the US stock exchange

III. ADR are quoted and traded in US dollars

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GLOBAL DEPOSITORY RECEIPT(GDR)


GDR are normally traded in European countries primarily London & Luxembourg It helps to raise capital in two or more markets through a global offering It is a negotiable certificate usually represents a companys publicly traded equity or debt
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FOREIGN CURRENCY CONVERTIBLE BOND


Issued in currencies different from the issuing company's domestic currency Corporate issue FCCB's to raise money in foreign currencies option of converting the bonds into equity at a price determined at the time the bond is issued maturity period of about five years Indian companies can raise up to $50 million in a FY

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RECEIVABLE MANAGEMENT
Any fool can lend money, but it takes a lot of skill to get it back

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INTRODUCTION
 What are receivables? Receivables are sales made on credit basis. Cash Receivables

 Why do we need receivables? Reach sales potential Competition

Operating Cycle

 Understanding Receivables As a part of the operating cycle Inventory

Time lag b/w sales and receivables creates need for working capital

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GRANTING CREDIT
Basic decisions

1. To give credit or not

2. Duration of credit period

Decision based on cost-benefit analysis Positive net benefit-Credit granted Negative net benefit- Credit not granted
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DIFFERENT TYPES OF COSTS ASSOCIATED

COLLECTION COST: Administrative costs incurred in collecting the accounts receivable.

CAPITAL COST: Cost incurred for arranging additional funds to support credit sales.

DELINQUENCY COST: Cost which arises if customers fail to meet their obligations.

DEFAULT COST: Amounts which have to written off as bad debts.

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OBJECTIVES
Creating, presenting and collecting accounting receivables Establish and communicate the credit policies Evaluation of customers and setting credit limits Ensure prompt and accurate billing Maintaining up-to-date records Initiate collection procedures on overdue accounts

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STEPS IN CREDIT ANALYSIS Investigating the customer


Customer Evaluation- The 5 Cs

Character- Reputation, Track Record Capacity- Ability to repay( earning capacity) Capital- Financial Position of the co. Collateral- The type and kind of assets pledged Conditions- Economic conditions & competitive factors that may affect the profitability of the customer
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STEPS IN CREDIT ANALYSIS


Financial statements: long term, short term solvency etc can be judged Bank references: information about the customer from bank Trade references: information about customer obtained from firms based on their experiences Credit bureaus: to check the financial viability of the business Third party guarantees Field visit: to get information of the existence and general condition of the customers business

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BENEFITS OF CREDIT ANANLYSIS


Helps improve customer satisfaction Takes control of sales processes Enhance your productivity Helps to increase revenue allocation Providing access to vital information

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COLLECTION METHODS IN RECEIVABLE MANAGEMENT


Centralised / Decentralised collection system Post dated cheques Pay Orders / Bank drafts Bills of Exchange Lock box System Drop box System Factoring Collection staff/ agents Debt collector Del Credere agent Concentration banking

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COLLECTION METHODS
Centralised / Decentralised collection system Post dated cheques Pay Orders / Bank drafts Bills of Exchange Lock box System Drop box System Factoring Collection staff/ agents Debt collector Del Credere agent Concentration banking Under a lock box system, customers are advised to mail their payments to special post office boxes called lockboxes, which are attended to by local collection banks, instead of sending them to corporate headquarters.

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COLLECTION METHODS
Centralised / Decentralised collection system Post dated cheques Pay Orders / Bank drafts Bills of Exchange Lock box System Drop box System Factoring Collection staff/ agents Debt collector Del Credere agent Concentration banking

Under a typical factoring arrangement a factor collects the accounts on due dates, effects payments to the firm on these dates and also assumes the credit risks associated with the collection of the accounts.

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COLLECTION METHODS
Centralised / Decentralised collection system Post dated cheques Pay Orders / Bank drafts Bills of Exchange Lock box System Drop box System Factoring Collection staff/ agents Debt collector Del Credere agent Concentration banking

an agency, factor, or broker acting as an intermediary between sellers and buyers and guaranteeing payment

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COLLECTION METHODS
Centralised / Decentralised collection system Post dated cheques Pay Orders / Bank drafts Bills of Exchange Lock box System Drop box System Factoring Collection staff/ agents Debt collector Del Credere agent Concentration banking

A firm may open collection centres (banks) in different parts of the country to save the postal delays. This is known as concentration banking.
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CONTROL OF RECEIVABLES MANAGEMENT

ABC Analysis of Receivables A Represents a small proportion of accounts of debtors representing a large value B Represents moderate value C Represents a large number of accounts of debtors but representing a small amount
Category % of accounts to Total Accounts 15 35 50 % of Balance Outstanding to Total Debtors Balance 75 20 5
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A B

PROFORMA
Credit Policy Credit Period (days/ weeks/months) Particulars Sales Less: Variable Cost Contribution Less: Fixed Cost Profit [Benefits (A)] Total Cost= Variable Cost +Fixed Cost Average Investment in Receivables (Based on Total Costs) Costs of Extending Credit: 1) ____ % Opportunity Cost of Capital (Calculated on Avg. Invst. in Receivables) 2) Bad debts as % of Sales 3) Credit Collection and Admin costs Total Costs [B] Net Benefits [A-B] Incremental Net Benefits xx xx xx xx Present Policy xx Rs. xxxx xx xxx xx xxx xxx Option 1 xx Rs. xxxx xx xxx xx xxx xxx Option 2 xx Rs. xxxx xx xxx xx xxx xxx Option 3 xx Rs. xxxx xx xxx xx xxx xxx

xx xx xxxx xxx ---

xx xx xxxx xxx xx

xx xx xxxx xxx xx

xx xx xxxx xxx
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PRACTICAL PROBLEM OF RECEIVABLE MANAGEMENT

Present Situation: Sales= Rs. 50 Lacs Variable cost = Rs. 40 Lacs Fixed Costs = Rs. 6 Lacs Credit to Debtors = 30 Days Assumed 360 Days a year Expected pre-tax ROI @ 25%
Proposed Credit Policy 1 2 3 4 Proposed Credit Period 45 Days 60 Days 75 Days 90 Days Sales (Rs. In Lacs) 56 60 62 63
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Evaluation of credit Policies Particulars Avg. Collection Period Sales Less: Variable Cost (80 % of sales) Contribution Less: Fixed Cost Profit Incremental Profit (A) Total Costs Investment in Debtors Increase in Debtors Required additional ROI (B) Incremental Profits (A-B) Present 1 2 3 4

30 Days 45 Days 60 Days 75 Days 90 Days Rs. Rs. Rs. Rs. Rs. 50 56 60 62 63 40 10 6 4 46 3.83 44.8 11.2 6 5.2 1.2 50.8 6.35 2.52 0.63 0.57 48 12 6 6 2 54 9 5.17 1.29 0.71 49.6 12.4 6 6.4 2.4 55.6 11.58 7.75 1.94 0.46 50.4 12.6 6 6.6 2.6 56.4 14.1 10.27 2.57 0.03
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