Module 6: Current Liabilities Management

• They are financing that arises from the normal course of business.

  Spontaneous Liabilities
• These obligations of a company, which are spontaneous liabilities, that are accumulated automatically as a result of the firm’s day-to-day business.

  Short-term Financing
• It is the major source of unsecured short-term financing for business

  firms.

  Accounts Payable
• Two Parts of Average Payment Period


  1. The time from the purchase of raw materials until the firm mails the payment.
  2. The time it takes after the firm mails its payment until the supplier has withdrawn spendable funds from the firm’s account.
• It is a firm's management of the time that elapses between its purchase of raw materials and its mailing payment to the supplier.


  Accounts Payable Management
• Basic Factors in Selecting Source of Short-term Financing


  • The effective cost of the credit source
  • The availability of credit
  • The effect of the use of a particular source of credit on the cost and availability of other sources.
• It refers to the yearly interest generated by a sum that's charged to borrowers or paid to investors.

  Annual Percentage Rate
• Formula of ANNUAL PERCENTAGE RATE (APR)

  $APR\ =$$\ \left(\frac{Interest}{\Pr incipal}\right)\cdot\ \left(\frac{1}{time}\right)$
• FORMULA of INTEREST AMOUNT

  $InterestAmount\ =$$\ P\cdot rate\cdot time$
• They are liabilities for services received for which payment has yet to be made.

  Accruals
• Sources of Short-term Credits

  • Unsecured Credits
  • Secured Funds
• These consists of all those sources that only have as their security

  the lenders trust and confidence on the ability of the borrower to repay the funds when due.

  Unsecured Credits
• These include additional security in the form of assets that are pledged as collateral in the event the borrower defaults in payment of principal and interest.

  Secured Funds
• Unsecured Short-term Credits

  • Trade Credit
  • Commercial Bank Loans
  • Commercial Paper
• It provides one of the most flexible sources of financing available to a firm.

  Trade Credit
• They have traditionally offered savings (time deposit) and checking

  accounts, and served as lenders for a variety of purposes.

  Commercial Bank Loans
• Forms of Commercial Bank Loans

  • Lines of Credits
  • Transaction Loans
• They are generally informal agreement or understanding between the

  borrower and the bank as to the maximum amount of credit that the bank will provide the borrower at any one time.

  Lines of Credits
• They are another form of unsecured short-term bank credit. In contrast to a line of credit, it is made for a specific purpose.

  Transaction Loans
• This consists of short-term, unsecured, notes payable issued in large denominations by large companies with high credit ratings to other companies and institutional investors, such as pension funds, banks and insurance companies.

  Commercial Paper
• Advantages of Commercial paper


  • Interest rates are generally lower than rates on bank loans and comparable sources of short-term financing.
  • No minimum balance requirements like compensating balances.
  • It offers the firm with very large credit needs from single sources.