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Financing Technique and Management Teams

Describe a short term financing technique and/or instrument with which you are familiar. How are they used in practice?

Using a company with which you are familiar, briefly describe in general terms how management teams might manage working capital by focusing operational efforts on a current asset or current liability.

What results can be achieved?

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Companies pay attention to short term finance in order to run the business operations smoothly. There is a trade off between liquidity and profitability. The issues for short term planning will be to make ideal balance between the liquidity and profitability.

What causes companies to have the short-term financing needs?
The need arise for:
? Transaction Motive
To make payments for acquisition of resources and services
? Precautionary Motive
To meet any emergency situation.
? Speculative Motive
To take advantages of speculative changes in prices of input and output.
Thus it is required because of lag in cash inflows and outflows. Lag is due to the operating cycle and financing is required to plug the gap between outflows and inflows.

Short term financing techniques:

Bank Borrowings
Various sources of short term financing from the Bank:

? Overdraft
? Cash Credit
? Purchase or Discounting of Bills
? Letter of Credit
? Working Capital Loan
In most of the cases the customer have to keep some security or they have to pledge their assets. One has to pay interest on these type of finances. Security can be in form of:
? Hypothecation
? Pledge
? Mortgage
? Lien

They are used in following manner:

A line of credit is a long-term commitment by a commercial lender to honour the day to day cheques of a business up to a maximum figure agreed to in consultation with the business. The lender retains a number of signed drafts (notes held for discount) from the business on hand to use as required to place funds as needed into the account. The business was made responsible for depositing all sales revenues on a regular basis into the account to "buy down" the outstanding loan balance whenever there were the funds available to do so.

Operating Term Loans for working capital are used to enable a retail, service or manufacturing business to purchase raw materials, retail or parts inventories, process or promote these and pay monthly expenses including principal and interest on outstanding term loans, wages and salaries, rentals, leases, utilities, etc.

Overdrafts are the most important source of short-term finance available to businesses. They can be arranged relatively quickly, and offer a level of flexibility with regard to the amount borrowed at any time, whilst interest is only paid when the account is overdrawn

I am using JC Penny
JC Penny is one of the largest retail chains of ...

Solution Summary

This solution of 1,528 words describes the need for companies to have short-term financing needs and gives examples of techniques that are used in practice. It also uses JC Penny to describe how management teams manage working capital and the results achieved.