IMPORTANCE OF TRADE CREDIT AND ACCRUALS AS SOURCES OF WORKING CAPITAL

• QUICK REVISION OF OLD PAPERS OF WORKING CAPITAL MGMT
  IMPORTANCE OF TRADE CREDIT AND ACCRUALS AS SOURCES OF WORKING CAPITAL
  MANAGEMENT OF WORKING CAPITAL
• FINANCIAL MGMT
• SHORT TERM WORKING CAPITAL

1. AFTER SETTING UP BUSINESS,FUNDS ARE REQUIRED TO MEET DAY TO DAY EXPENSES FOR :
2. PURCHASING OF THE RAW MATERIALS
3. PAYMENT OF WAGES
4. PAYMENT OF RENT
5. PAYMENT OF WATER AND POWER CHARGES ETC
6. CONTINUOUS NECESSITY OF LIQUID CASH TO BE AVAILABLE FOR MEETING THESE EXPENSES
7. IF THE FIRM IS NOT ABLE TO MEET THE SHORT TERM FUNDS,MAY EVEN HAS TO CLOSE THE  BUSINESS

• ACCRUALS ( INTERNAL SOURCES)

1.     ACCRUALS ARE THE LIABILITIES COVERING EXPENSES INCURRED ON AND PRIOR TO SPECIFIED DATE.PAYABLE AT SOME FUTURE DATE

2.     ACCRUED EXPENSES ARE THOSE EXPENSES WHICH ARE DUE BUT NOT YET PAID

3.     SIMPLY MEANS A LIABILITY THAT A FIRM HAS TO PAY FOR THE SERVICES ALREADY RECEIVED BY IT

4.     MOST IMPORTANT ITEMS OF ACCRUALS ARE :-

a.    WAGES AND SALARIES

b.    INTEREST AND TAXES

5.     WAGES  AND SALARY ARE GENERALLY PAID AFTER ONE MONTH ,OR AFTER 15 DAYS OR AFTER WEEK

6.     THE LONGER THE PERIOD,THE GREATER IS THE AMOUNT OF LIABILITY AND MORE FUNDS ARE NEEDED

7.     IN THE SAME MANNER,ACCRUED INTEREST AND TAXES ARE ALSO CONSTITUTE SHORT TERM SOURCE OF FINANCE

8.     AS TAXES ARE PAID TO GOVERNMENT AFTER COLLECTION AND IN THE MEAN TIME THEY SERVE AS SHORT TERM FINANCING

9.     INTEREST IS ALSO PAID PERIODICALLY WHILE THE FUNDS ARE USED CONTINUOUSLY

• ADVANTAGE:-
• INTEREST FREE
• DISADVANTGE:

1. MAY SPOIL THE IMAGE OF THE COMPANY IF THEY ARE PAID ON TIME
2. LIMITED BY LEGAL,CONTRACTUAL AND PRACTICAL CONSIDERATIONS

• ACCRUALS

1.     DEFERRED INCOMES:-ARE THE INCOME RECEIVED IN ADVANCE BEFORE SUPPLYING GOODS OR SERVICES,

2.     THEY REPRESENT FUNDS RECEIVED BY FIRM FOR WHICH IT HAS TO SUPPLY GGODS OR SERVICES IN FUTURE

3.     THESE FUNDS INCREASE THE LIQUIDITY OF A FIRM

4.     CONSTITUTE AN IMPORTANT SOURCE OF FINANCE

5.     BUT THE FIRM HAVING REPUTATION CAN DEMAND DEFFER ED INCOME

·         TRADE CREDIT/CUSTOMER CREDIT

1. REFERS TO CREDIT EXTENDED BY THE SUPPLIER OF GOODS AND SERVICES
2. TRADE CREDIT ARRANGEMENT OF A FIRM WITH ITS SUPPLIER IS AN IMPORTANT SOURCE OF SHORT TERM FINANCE
3. THE PERIOD OF CREDIT DEPENDS UPON THE NEGOTIATION BETWEEN BUYER AND SELLER
4. THE CREDIT WORTHINESS OF A FIRM AND THE CONFIDENCE OF ITS SUPPLIER ARE THE MAIN BASIS OF SECURING TRADE CREDIT
5. MOSTLY GRANTED ON OPEN BASIS WHERBY THE SUPPLIER SENDS GOODS TO THE BUYER FOR PAYMENT TO BE RECEIVED IN FUTURE AS PER THE TERMS OF THE SALES INVOICE
6. MOREOVER BILLS WHICH ARE DRAWN CAN BE DISCOUTED AND THE SELLER DOES NOT HAVE TO HOLD TILL MATURITY TO RECEIVE PAYMENT

• MANAGEMENT OF TRADE CREDIT
• TRADE CREDIT TO TOTAL  CURRENT ASSET RATIO:=TRADE CREDIT/TOTAL CURRENT ASSETS
• INDICATES THE MAGNITUDE OF THE USE OF TRADE CREDIT IN FINANCING TOTAL CURRENT ASSETS OF THE ORGANIZATION. LOWER TH RATIO BETTER IS
• TRADE CREDIT TO TOTAL CURRENT LIABILITIES= TRADE CREDIT/TOTAL CURRENT LIABILITIES
• PROPORTION OF TRADE CREDIT TO TOTAL CURRENT LIABILITIES. A HIGH RATIO MEANS DEPENDENCE ON SPONTANEOUS SOURCE AND FIRM IS HAVING PROBLEM IN GETTING SHORT TERM FUNDS FROM OTHER SOURCES
• TRADE CREDIT TO SALES RATIO=TRADE CREDIT/SALES. USEFUL FOR THE PURPOSE OF COMPARISON
• PERCENTAGE CHANGE IN TRADE CREDIT TO PERCENTAGE CHANGE IN SALES RATIO=% CHANGE IN TRADE CREDIT/%CHANGE IN SALES. LOWER THE RATIO. BETTER IS THE MGMT OF FUNDS

• ADVANTAGES

1. EASY AVAILABILITY
2. FLEXIBILITY
3. NO DOCUMENTATION

·         DISADVANTAGES:

1. CHARGING OF HIGH PRICES BY THE SUPPLIER
2. LOSS OF CASH DISCOUNT