ALL INFORMATION ABOUT CREDIT(advantages & disadvantages) AND BUDGET

The desirability of budgeting

Budget is a document which documents the plan of the business. This may include the objective of business, targets set, and results in financial terms, e.g., the target set for sale, resulting cost, growth, required investment to achieve the planned sales, and financing source for the investment. Also budget may be long term or short term. Long term budgets have a time horizon of 5–10 years giving a vision to the company; short term is an annual budget which is drawn to control and operate in that particular year.

Capital budget
This concerns proposed fixed asset requirements and how these expenditures will be financed. Capital budgets are often adjusted annually and should be part of a longer-term Capital Improvements Plan.

Cash budget
Working capital requirements of a business should be monitored at all times to ensure that there are sufficient funds available to meet short-term expenses.

The cash budget is basically a detailed plan that shows all expected sources and uses of cash. The cash budget has the following six main sections:

Beginning Cash Balance - contains the last period's closing cash balance. Cash collections - includes all expected cash receipts (all sources of cash for the period considered, mainly sales) Cash disbursements - lists all planned cash outflows for the period, excluding interest payments on short-term loans, which appear in the financing section. All expenses that do not affect cash flow are excluded from this list (e.g. depreciation, amortisation, etc) Cash excess or deficiency - a function of the cash needs and cash available. Cash needs are determined by the total cash disbursements plus the minimum cash balance required by company policy. If total cash available is less than cash needs, a deficiency exists. Financing - discloses the planned borrowings and repayments, including interest. Ending Cash balance - simply reveals the planned ending cash balance.

Management of current assets

Credit policy

Credit gives the customer the opportunity to buy goods and services, and pay for them at a later date.

Advantages of credit trade

Usually results in more customers than cash trade. Can charge more for goods to cover the risk of bad debt. Gain goodwill and loyalty of customers. People can buy goods and pay for them at a later date. Farmers can buy seeds and implements, and pay for them only after the harvest. Stimulates agricultural and industrial production and commerce. Can be used as a promotional tool. Increase the sales. Modest rates to be filled.

Disadvantages of credit trade

Risk of bad debt. High administration expenses. People can buy more than they can afford. More working capital needed. Risk of Bankruptcy. May lose peace of mind.

Forms of credit

Suppliers credit:
Credit on ordinary open account Installment sales Bills of exchange Credit cards Contractor's credit Factoring of debtors Cash credit Cpf credits Exchange of product

Factors which influence credit conditions
Nature of the business's activities Financial position Product durability Length of production process Competition and competitors' credit conditions Country's economic position Conditions at financial institutions Discount for early payment Debtor's type of business and financial positions

Credit collection

Overdue accounts
Attach a notice of overdue account to statement. Send a letter asking for settlement of debt. Send a second or third letter if first is ineffectual. Threaten legal action.

Effective credit control
Increases sales Reduces bad debts Increases profits Builds customer loyalty Builds confidence of financial industry increase company capitlisation

Sources of information on creditworthiness
Business references Bank references Credit agencies Chambers of commerce Employers Credit application forms

Duties of the credit department

Legal action
Taking necessary steps to ensure settlement of account Knowing the credit policy and procedures for credit control Setting credit limits Ensuring that statements of account are sent out Ensuring that thorough checks are carried out on credit customers Keeping records of all amounts owing Ensuring that debts are settled promptly Timely reporting to the upper level of management for better management.

Stock

Purpose of stock control
Ensures that enough stock is on hand to satisfy demand. Protects and monitors theft. Safeguards against having to stockpile. Allows for control over selling and cost price. Stockpiling Main article: Cornering the marketThis refers to the purchase of stock at the right time, at the right price and in the right quantities.

There are several advantages to the stockpiling, the following are some of the examples:
Losses due to price fluctuations and stock loss kept to a minimum Ensures that goods reach customers timeously; better service Saves space and storage cost Investment of working capital kept to minimum No loss in production due to delays There are several disadvantages to the stockpiling, the following are some of the examples:

Obsolescence

Danger of fire and theft
Initial working capital investment is very large Losses due to price fluctuation Rate of stock turnover This refers to the number of times per year that the average level of stock is sold. It may be worked out by dividing the cost price of goods sold by the cost price of the average stock level.

Determining optimum stock levels
Maximum stock level refers to the maximum stock level that may be maintained to ensure cost effectiveness. Minimum stock level refers to the point below which the stock level may not go. Standard order refers to the amount of stock generally ordered. Order level refers to the stock level which calls for an order to be made.

Cash

Reasons for keeping cash
Cash is usually referred to as the "king" in finance, as it is the most liquid asset. The transaction motive refers to the money kept available to pay expenses. The precautionary motive refers to the money kept aside for unforeseen expenses. The speculative motive refers to the money kept aside to take advantage of suddenly arising opportunities.

Advantages of sufficient cash
Current liabilties may be catered for. Cash discounts are given for cash payments. Production is kept moving Surplus cash may be invested on a short-term basis. The business is able to pay its accounts in a timely manner, allowing for easily-obtained credit. Liquidity

Management of fixed assets

Depreciation
Depreciation is the allocation of the cost of an asset over its useful life as determined at the time of purchase. It is calculated yearly to enforce the matching principle.

Insurance
Main article: InsuranceInsurance is the undertaking of one party to indemnify another, in exchange for a premium, against a certain eventuality.

Uninsured risks
Bad debt Changes in fashion Time lapses between ordering and delivery New machinery or technology Different prices at different places Requirements of an insurance contract Insurable interest The insured must derive a real financial gain from that which he is insuring, or stand to lose if it is destroyed or lost. The item must belong to the insured. One person may take out insurance on the life of another if the second party owes the first money. Must be some person or item which can, legally, be insured. The insured must have a legal claim to that which he is insuring. Good faith Uberrimae fidei refers to absolute honesty and must characterise the dealings of both the insurer and the insured.

Shared Services
There is currently a move towards converging and consolidating Finance provisions into shared services within an organization. Rather than an organization having a number of separate Finance departments performing the same tasks from different locations a more centralized version can be created.

Finance of states

Main article: Public financeCountry, state, county, city or municipality finance is called public finance. It is concerned with
Identification of required expenditure of a public sector entity Source(s) of that entity's revenue The budgeting process Debt issuance (municipal bonds) for public works projects

Financial economics
Main article: Financial economicsFinancial economics is the branch of economics studying the interrelation of financial variables, such as prices, interest rates and shares, as opposed to those concerning the real economy. Financial economics concentrates on influences of real economic variables on financial ones, in contrast to pure finance.

FINANCE DESCRIPTION

FINANCE

Finance is the science of funds management.The general areas of finance are business finance, personal finance, and public finance.
Finance includes saving money and often includes lending money. The field of finance deals with the concepts of time, money and risk and how they are interrelated. It also deals with how money is spent and budgeted.

Finance works most basically through individuals and business organizations depositing money in a bank. The bank then lends the money out to other individuals or corporations for consumption or investment, and charges interest on the loans.

Loans have become increasingly packaged for resale, meaning that an investor buys the loan (debt) from a bank or directly from a corporation. Bonds are debt sold directly to investors from corporations, while that investor can then hold the debt and collect the interest or sell the debt on a secondary market.Banks are the main facilitators of funding through the provision of credit, although private equity, mutual funds, hedge funds, and other organizations have become important as they invest in various forms of debt. Financial assets, known as investments, are financially managed with careful attention to financial risk management to control financial risk. Financial instruments allow many forms of securitized assets to be traded on securities exchanges such as stock exchanges, including debt such as bonds as well as equity in publicly-traded corporations.

Central banks act as lenders of last resort and control the money supply, which affects the interest rates charged. As money supply increases, interest rates decrease.

The main techniques and sectors of the financial industryMain article: Financial servicesAn entity whose income exceeds their expenditure can lend or invest the excess income. On the other hand, an entity whose income is less than its expenditure can raise capital by borrowing or selling equity claims, decreasing its expenses, or increasing its income. The lender can find a borrower, a financial intermediary such as a bank, or buy notes or bonds in the bond market. The lender receives interest, the borrower pays a higher interest than the lender receives, and the financial intermediary pockets the difference.

A bank aggregates the activities of many borrowers and lenders. A bank accepts deposits from lenders, on which it pays the interest. The bank then lends these deposits to borrowers. Banks allow borrowers and lenders, of different sizes, to coordinate their activity. Banks are thus compensators of money flows in space.

A specific example of corporate finance is the sale of stock by a company to institutional investors like investment banks, who in turn generally sell it to the public. The stock gives whoever owns it part ownership in that company. If you buy one share of XYZ Inc, and they have 100 shares outstanding (held by investors), you are 1/100 owner of that company. Of course, in return for the stock, the company receives cash, which it uses to expand its business; this process is known as "equity financing". Equity financing mixed with the sale of bonds (or any other debt financing) is called the company's capital structure.

Finance is used by individuals (personal finance), by governments (public finance), by businesses (corporate finance), as well as by a wide variety of organizations including schools and non-profit organizations. In general, the goals of each of the above activities are achieved through the use of appropriate financial instruments and methodologies, with consideration to their institutional setting.

Finance is one of the most important aspects of business management. Without proper financial planning a new enterprise is unlikely to be successful. Managing money (a liquid asset) is essential to ensure a secure future, both for the individual and an organization.