Financing the Short Term Obligations of the Business



Financing the Short Term Obligations of the Business

Introduction

The paper attempts to explain the concept of short term financing and describes four major short term financing sources. The paper also analyzes two different companies, Edcon Holdings Limited and Woolworths Holding Limited and highlights the liquidity and efficiency ratios of these companies as per the actual financial statements attached in the appendix section of the report. Furthermore, the paper enlightens the concept of liquidity and efficient management by way of interpreting the liquidity and efficiency ratios of the two companies.



Task 1

Short term financing is required for the purpose of running day to day operations of the business. Short term financing can broadly be categorized into four types, which are desscribed below:

The Short-Term Financing from Banks

Borrowing from banks is a short-term financing included on the balance sheet as "Notes payable". It is, proportionately, the second largest source of short-term financing and is mostly utilized for the purpose of paying of creditors.

Trade Credit

In its activities, the company provides credit supplies and raw materials from other companies. It records the debt to suppliers account called trade credit. They constitute the largest category of short-term credit representing about 40% of current liabilities of nonfinancial corporations. It is a spontaneous source of financing, in that it comes from the usual business activities (Harris, 1998, pp 27 - 34).

The Financing of Accounts Receivable

It is possible to finance accounts receivable by pledging invoices (or credit) or selling (factorage). When there is a pledge of accounts receivable, the factor not only has an interest in the receivables, but it also has a claim against the borrower (seller). If the individual or company that purchased the goods does not pay the invoice, the selling firm must absorb the loss. As companies factorage provide trade finance by making loans secured on accounts receivable, they automatically funded debts of corporate borrowers (Harris, 1998, pp 27 - 34).

Inventory Financing

Stocks guarantee credit is a substantial enough form of short-term financing. A floating charge debenture gives the lender a right to all elements of the active current and future that are not already pledged. Since under the debenture, the bank does not have direct control over the active, it must protect against any erosion of buying power. Therefore, the debentures have clauses trustees and special endorsements.

Task 2

The companies selected for this task are Edcon Holdings Limited and Woolsworth Holdings Limited. Edcon Holdings Limited has a very sound working capital and its current assets are twice as many as its current liabilities. This is reflected in the currernt ratio calculated later in the paper. The basic means of short term financing is trade credit. In comparison, Woolsworth Holdings Limited has borrowed the short term financing from bank to meet its working capital requirements. Woolsworth Holdings Limited has a lower current ratio compared that to the Edcon Holdings Limited.

A detailed financial analysis of the two organizations is provided here onwards, which encompasses various aspects ...