Found 1120 Articles for Banking & Finance

Credit Policy: DefinitionCredit policy is mainly dependent on the volume of credit sales and the collection period. The volume of credit policy is a function of a company’s gross sales and the percentage of credit sales to total sales. Total sales of a company depend on many factors, such as market size, market share, quality of products, competition, etc.Companies may sell their products in credit for various reasons, such as gaining more market share and being competitive in the industry. Credit sales create trade debtors or accounts receivables where the seller needs to wait for a certain period for the ... Read More

What is Credit Policy?The credit policy of a firm is a marketing tool or it can be used as a marketing tool to expand the business. A firm that has a good credit policy in place is advantageous among its peers in the industry. Buyers would prefer a seller that offers its goods or services through a credit policy that is not too stringent. Credit policy helps firms retain old customers and create new ones. It is therefore essential for firms to have a good credit policy to grow in business.Before we consider the objectives of credit policy, it is ... Read More

The credit policy is an important tool to improve the selling efforts of a company. However, before discussing about credit policy, it is important to first understand about trade credit and its characteristics.What is Trade Credit?Trade credit is an important feature of a business policy of a firm. Companies need to sell their products or services the value of which will be paid in the future to make their offers to sellers more competitive. Trade credit is also a way manufacturers adopt to make the product offer more attractive to the point of sale sellers.Trade credit creates trade debtors or ... Read More

A business firm may choose to go with long-term, short-term, or a mix of the two to finance its operations.Depending on the mix of short- and long-term approaches, three types of working capital policies may be found which are as follows −Matching ApproachWhen the expected life of assets is matched with the expected life of the source of funds, the approach is known as the matching approach. In this approach, short-term financing is used for short-term assets while long-term financing is used for long-term assets.The justification for such an approach is that since financing is meant for paying the assets, ... Read More

Businesses often need to decide whether they will go for short or long-term financing for running their businesses. The main aim of an organization is to offer maximum wealth to shareholders which is possible when a firm generates enough profits. However, the organizations must also keep an eye on the interest rates because the rates may sometimes be palpable to eat a significant chunk of earnings.It has been generally observed that short-term financing is preferable to long-term funding. Short-term financing has the benefits of cost and flexibility that make it more attractive than long-term financing.Following points will help you understand ... Read More

Fixed Investment Ratio MethodEvery business needs to maintain an optimum level of working capital to run the business smoothly. While excessive working capital harms the business inadequate amount of working capital is also a matter of concern. Therefore, businesses must estimate the working capital needs for the shorter and longer-term efficiently.The fixed investment ratio method for the calculation of working capital is a popular method. The fixed investment ratio method is one such method that can be adopted to determine the working capital needs of a company.Working Capital Calculation as A Percentage of Fixed AssetsThe calculation of working capital a ... Read More

What is Sales Ratio Method?The sales ratio method is one of the easiest methods of calculating working capital. This method is based on the assumption that “history repeats itself.”Therefore, to determine the working capital in this method, one has to have the past figures of sales in hand.In the sales ratio method, the figure of working capital is determined as a percentage of sales, and the figure is obtained from the past performances of the company. This method is similar to technical analysis of the stock market where past performances of the stock are used to determine the future price ... Read More

Current Assets Holding Period MethodThe current assets holding period method is used to estimate the working capital needs of an organization based on the current assets the company holds. To estimate the working capital needs, the average holding period of the current assets is related to costs based on the firm’s experience in the last year. This method is essentially an operating cycle method.There are a host of factors that affect the working capital calculations. Factors that are most influential includeSeasonal fluctuationsInvestment costsAccurate sales forecastsVariability in sales priceCredit policiesProduction cycleCollection policies.Operating or Working Capital CycleThe operating cycle of a product ... Read More

Trade-off Theory of Capital StructureIn the risk-return trade-off theory of capital structure, there is an optimum level of current assets and/or working capital that a company must maintain to gain the optimum level of profitability. There is another way to look into the risk-return trade-off theory of business companies. It is related to the liquidity of the company.In fact, there are costs of maintaining current assets at a certain level. One of these costs is the cost of liquidity while the other is the cost of illiquidity.Excessive Amount of Current AssetsA company’s level of liquidity will be very high if ... Read More

LiquidityThe liquidity and profitability of a company are directly related to the working capital. When a company maintains high temporary working capital in current assets, it is known to be more liquid. The companies that maintain a lower level of working capital are known as less liquid.Companies that maintain higher liquidity and considered to be at lower risk. They are able to meet the needs of the company and their reservoir of current assets lets them have the freedom to stay solvent.However, more liquid companies have lower profitability because their funds are tied up in operations and these funds cannot ... Read More