tong hop eng4

8/3/2019 Tong Hop Eng4

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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

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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

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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

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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

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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

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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

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