Download - Tong Hop Eng4
-
8/3/2019 Tong Hop Eng4
1/6
Unit 1: Factoring
Reading 1
Free marketis a place where there are many suppliers competing to supply one product or service.
Trade creditis a credit offerred by one company when trading with another
Consumer creditis a credit given by a shops, banks, and other financial institutions to consumers so
that they can buy goods
Reading 2
Factoringis a way of raising money from unpaid invoice (Suppliers point of view)
Factoringis a business of buying the invoices of the suppliers at a discount ( Factors point of view)
Factoring process:
1. Supplier sells goods for their customers and receives unpaid invoices.
2. Factor agrees to buy the invoices of the supplier at a discount.
3. Supplier receives money (M2) from the factor
4. The factor makes money by getting the full value of the invoices ( M1 ) from the customers on maturitydate.
M1 is bigger than M2
M1 is called face value or full value
M1 M2 = discount = factors frofits
Reading 3
3 main forms of factoring:
Full factoring
Agency factoring Confidential invoice discounting
2 ways to buy unpaid invoice
Without recourse: Pay to suppliers without getting money back
With recourse: pay money to suppliers and can get money back if customers dont pay it
Full factoring:
Sales ledger administration
Checking the creditworthiness and credit status of the customers of their customers
Sending out invoices Collecting payment
Chasing slow payers
Credit management
The factoring company uses its information about the creditworthiness and credit status of the
companies which want to buy from its customer.
The factor decides to buy the unpaid invoices or not
- With good risk customers: buy invoices without recourse
- With poor risk customers: buy invoices with recourse
- With bad risk customers: refuse to buy the invoices
The factor buys unpaid invoices from the suppliers at a discount
The suppliers receive money
Advance payment
The factor pays the customer, in advace, 80% of the value of the invoice as soon as the invoice is raised
1
-
8/3/2019 Tong Hop Eng4
2/6
This is equivalent to borrowing from the bank using ones invoices as security and banks will charge 2
-4% over their base rate.
Regulation of cash flow
The factor agreed to discount invoices
The supplier receives unpaid invoices from their customers
The factor pays the value of the invoices ( M1 ) on an agreed date, say 30 days after the issurance of the
invoices. At maturity date, the suppliers collects money from their customers
The suppliers gives money (M2) back to the factor
- M2 is bigger than M1- Advantage: the customer knows in advance when the money is coming in and can use this money to pay
wages, salaries or other debts which have to be paid at fixed times.
Agency factoring
Provide forlarge companies which have their own computer system
Factors may provide advance payment and advice
Confidential invoice discounting
Provide for large companies
Factors offer 80% of all or part of invoices selected by suppliers
Unit 2: Advising a business
Reading 1
Budgeting
Income
Costs
- Variable costs: changed depending on the output (e.g. Raw materials, transport, energyetc)
- Fixed costs: not depend on the output (e.g. Upkeep machinery, wages and salaries, office servicesetc)
Costs must be related to income
Cash flow forecasting
Current expenses: costs which have to be paid in a short time, included costs of materials, wages,
salaries, overheads.
Pricing
Cash discount: is a discount given for payment is cash ( for early payment)
Trade discount: is a reduction in price given to a customer in the same trade ( for bulk purchases)
Reading 2
Stock control
Stock consists of raw materials, work in progress and finished goods.
The amount of stock depends on: Process of product, quality of raw materials, and quantity of materials.
The rate of turnover at each stage should be calculated and related to expected sales.
Management accounting
Therere at least 4 types of accounts: Account of costs, account of sales, account of credit and account
of profitability
2
-
8/3/2019 Tong Hop Eng4
3/6
There should be a consolidated credit account for all trade debtors.
lyordertotalmonth
dingAmountoutsreditAccountofc
tan= of each customer
Consolidated credit account =lyordertotalmonth
dingAmountouts tan
Profitability account = %100*Pr
Costs
ofits
Basic account of sales and purchases should be kept up to date by an account clerk
Costing There are 2 types of costs: Real costs of production (including the costs of assets and costs of materials)
and opportunities costs.
Credit control This is an aspect of management which will become more important in the future
Much of work in credit control depends on information about credit status or creditworthiness of
existing and potential customers.
Reading 3 Short- term finance Loan, overdraft or factoring (offered when enough credit information on the debtors is available)
Medium term finance Leasing is a form of renting. At the end of a leasing agreement the lessor still owns the equipment,
though it may be sold to the lessee for a small sum
Lease purchase is a form of renting and buying at the same time. At the end of a lease purchase , the
lessee owns the equipment.
Long term finance Provided by banks
Used for major expansion
Suitable for buying large capital assets
Gearing could be raise
Share flotation
1. The bank could arrange for the company to sell equity shares to the public.
2. In return of buying a share, the shareholder will have equity, or participate, in the profit of the
company, according to the whole of the share capital.
Venture capital
1. Merchant banks or other organizations could be interested in investing venture capital
2. They invest in a company in return for part control of the investment.
Different between Borrowing and Seeking new investment
Borrowing Seeking new investment
Interest is paid
Principal is paid on time its easy
to be declared bankrupt if no profit is made.
Tax shield can be obtained save
costs
More responsible for the money
Be preferred by investors
Dividend is paid when profit are made
only.
Share capital doesnt have to be paid.
The ownership is dividend into small
parts difficult to make business decisions
Less responsible using money
Not be preferred by investors
3
-
8/3/2019 Tong Hop Eng4
4/6
Unit 3: International payment
Reading 1 A bill of exchange ( B/E) is an order sent by the drawer to the drawee stating that the drawee will pay
unconditionally on demand or at a specified time the amount shown on the bill
Tenor draft ( time bill) and Sight draft ( sight bill)
Sight draft Tenor draft
Paid on presentation
Used in a Documents against Payment
(D/ P) transaction. Presented to the importer
with the shipping documents
Paid on or within the number of day
specified on the bill
Used in a Documents against
Acceptance ( D/ A) transaction
The accepting bankis the bank which accepts the bill, honor the bill when it matures and take on the
risk and working of collecting payment plus the commission from the importers
The acceptance bill is the bill whose value is guaranteed by the accepting bank
Discount the tenor bill
Discounting means that the buyer pays the face value minus the discount
Discount is the interest on the bill for the remainder of its life. The longer the remainder of the bills
life, the less interest to be paid.
The discount depends on:
The status of the accepting house. The more well known the accepting house, the lower the interest
rate, the smaller the discount and the bigger the value of the bill on the market
The interest rate prevailing in the discount market at the time.
Reading 2 Process1. The exporter and the importer sign an export contract
2. The exporter ship the goods ordered by the importer
3. The importer sends payment either immediately or monthly, according to the agreement Bankers Draft Bankers draft is a cheque drawn by a bank on itself
Process
1. The payer brings money to the bank
2. The payer receives Bankers Draft (BD)
3. After signing an export contract, the payer sends BD by post to the payee
4. The payee represents the BD to the payers bank
5. The bank gives the payee money
In reality, the payee represents the BD to the correspondent bank which has the correspondent relation
with the bank of the payer and receives money from the correspondent bank.
Advantages
- Little paperwork
- Simple
- Time and money- saving
Disadvantages
- To the importer: The exporter may not ship goods, or may not ship goods on time or may not ship the
right goods
- To the exporter: after receiving goods, the importer may not pay or is enable to pay or delay payment.
Reading 3 Process
1. The exporter ships the goods to the port
2. The exporter receive shipping documents (from the transporter)
3. The exporter sends the shipping documents an B/E to his bank
4
-
8/3/2019 Tong Hop Eng4
5/6
4. The bank (remitting bank) sends them to a bank in the exporters country known as collecting
bank for collection
5. The collecting bank present the collection order together with B/E to the importer
6. The importer pays the bill immediately or finds a bank to accept the bill
7. The collecting bank delivers the shipping documents to the importer to get goods
8. The collecting bank sends money or the acceptance bill back to the remitting bank
9. The remitting bank sends money or acceptance bill back to the exporter
10. The importer brings the shipping documents to the port to receive goods
If the banks has provided in advance, it should have a letter of hypothecation from the exporter
which gives the bank the right to sell the goods if the importer defaults.
Advantages- Quick, simple and cheap
- The exporter have control over the goods until the draft is paid or accepted
Disadvantages- If the importer defaults, the exporter has the expense of selling the goods, storing them until later or
bringing them back to their own country.
Extra reading Types of L/C- Revocable credit
- Irrevocable credit
- Confirm credit
- Unconfirm credit
Revocable credit The opener can instruct his bank to amend or cancel credit at any moment without notice to the
beneficiary.
Usually unacceptable to the seller
Rarely in use in international trade unless the partners is a transaction are well known to each other
Irrevocable credit Most commonly in use in international trade
Cannot be amended or cancelled unless all parties concerned are agreeable.
Confirmed credit Process
1. The exporter and the importer sign a contract
2. The importer asks his bank to issue L/C
3. The importers bank asks a bank in the exporters country about L/C and asks them to
confirm L/C
4. That bank advises the exporter about L/C The importers bank is the issuing bank
The bank is the exporters country is advising bank, confirming bank and it can be exporters bank
Both the issuing bank and the confirming bank will be jointly responsible to the beneficiary
Unconfirmed credit Process
1. The exporter and the importer sign a contract
2. The importer asks his bank to issue L/C
3. The importers bank asks a bank in the exporters country about L/C
4. That bank advises the exporter about L/C
The importers bank is the issuing bank
The bank in the exporters country is advising bank and it can be exporters banks
Reading 4
5
-
8/3/2019 Tong Hop Eng4
6/6
Process1. An export contract between exporter and importer is made
2. The importer applies for a L/C and sends the application form to his bank to open a L/C in
favour of the exporter
3. The issuing bank issues a L/C and sends it to the advising bank
4. The advising bank sends the L/C to the exporter
5. The exporter agrees to the L/C or asks for amendment6. The exporter ships goods to the port and receives shipping documents
7. The exporter sends a B/E and shipping documents to his bank
8. The advising bank sends the B/E and shipping documents to the issuing bank to collect payment
9. The issuing bank pays money immediately if it is a sight draft or accepts payment if it is a tenor
draft
10. The issuing bank collects money from the importer
The bank of the exporter can be the advising bank
The issuing bank issues the credit on behalf of the importer
Advantages
- Its the safe method of payment
- The buyers and sellers are protected- Additional protection is provided for the importers by transit insurance
6