financereport-110206000019-phpapp02

8/4/2019 financereport-110206000019-phpapp02

1/15

By Group 4


2/15

FINANCING POLICY OF AFIRM

The financing policy for a firms working capitalor current assets involves the determination of

how these current assets should be financedwell as temporary or seasonal requirements assales increases.

As the firms operate at higher levels of sales, itrequires more inventories and cash for itsoperations


3/15

What is working capital?

It measures the funds that are readily available to operate a business.

Working capital = Current assets - Current liabilities

It is vital for a company to have sufficient working capital to meet

all its requirements.

The faster a business expands, the greater will be its working

capital needs.

Why is it important?


4/15

Sales and Working Capital of San Miguel Corporation 92-95


5/15

The working capital financingstrategies of a firm may becategorized as follows:


6/15

1. Conservative Approach

- the firm finances all of the permanent working capital requirements as

well as part of the temporary working capital requirement through long-

term financing.


7/15

2. Maturity Matching Approach

- involves the use of long-term debts and equity to finance all of the

permanent working capital and uses short-term debts to finance all of

the short-term working capital requirements.


8/15

3. Aggressive Approach

- because it involves the use of short-term funds to finance a portion of

permanent working capital requirements.


9/15

How Do Philippine Firms FinanceWorking Capital?

Working capital financing in small and medium enterprises is

normally needed to bridge the gap between suppliers credit termsand the firms working capital cycle.

Loan financing of some firms was provided by the DevelopmentBank of the Philippines (DBP). DBP normally provides workingcapital loans at very favourable terms to small and medium-sized firms that avail of longer-term loans for capital expenditure fromDBP.

Ifworking capital is tight, consider other ways of financingcapital investment, such as loans, fresh equity, or leasing.


10/15

Working Capital Cycle


11/15

Commercial banks provide short-termfinancing for working capital requirements offirms. The loan facilities range from straightterm loans to credit lines for various purposes.

Short-Term BankLoans


12/15

Interest Rates

Interest rates for bank loans are influenced by

benchmark rates in capital markets such asManila Reference Rates, Treasury bill rates andthe banks own cost of funds.

E.g. the interest rates they payon savings and time depositsand the reserved requirements.


13/15

Short-Term Loans Granted By PhilippineCommercial Banks

Loans - Payable on a fixed date or within a specifiedperiod of time for which interest is not collected in

advance or discounted from the face value of promissorynote.

Credit Line - A type of accommodation wherein the

bank makes funds available to the client up to aspecified amount during the year. Draw downs are madevia 30-180 day promissory notes.

Loans to Importers/Exporters (LCTR Line)A credit line extended to im orters to facilitate the


14/15

One-shot foreign exchange LC - This is similar to LCTR line but may be

availed only once.

Domestic LC Same as LCTR line but applies to domestic transactions.

Export Packing Credit Line Advance payment to an exporting firm in

order for it to undertake processing and packaging.

BPL (Bills purchased line)

Omnibus Line

Standby Letter of Credit (Domestic)

Demand Loan

Money Market Line


15/15

This chapter has two parts: working capital policy and sources of

short-term funds.

Working capital policy is concerned with the manner in which the firmscurrent assets or working capital should be financed. Working capital consists of

a permanent components as well as seasonal or temporary requirements. In

financing working capital, three financing strategies or approaches were

discussed: a) the conservative approach, b) the maturity matching approach, and

c) the aggressive approach.

The Second Part of the chapter identified some sources of short-term funds,

namely: a) bank loans, b) commercial paper issues, c) trade financing, and d)

receivable factoring.

Summary

Documents

financereport-110206000019-phpapp02