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The most common short term sources of finance that corporations use to generate funds - Essay Example

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The paper discusses the most common short term sources of finance that corporations use to generate funds. Short term finance sources refer to sources that have to be repaid within a year. These are important tools which help in operating the business efficiently…
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The most common short term sources of finance that corporations use to generate funds
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Download file to see previous pages This study looks into the short term finances that help in making a long term strategy for the business. They can be used to pay for the salaries of the employees and other administrative costs. There are four most common short term sources of finance that a business uses to finance its expenses and they are:
1) Bank overdraft
2) Short term loans
3) Trade credit
4) Sale of unused assets
In today’s modern era, every business maintains a bank account of its own where it deposits the money it receives from the sales generated by the business. As the businesses expand, the ratio of their cash sales ratio decreases to the credit sales ratio, because of which the businesses can face difficulties in paying their short term and immediate expenses such as paying salaries of their work and the heating bill. This is when the businesses ask ‘their’ bank for an overdraft so that they can pay for their expenses. Bank overdraft is a form of loan given by the bank to its customers and businesses, where the customers and businesses are charged interest on the money spent by them. Another option that a business can exercise to pay for its expenditures and administrative costs is by arranging a short term loan from the bank. Any loan taken from the bank that has to be repaid within a year can be defined as ‘short term loan’. Trade credit is the number of days in which a business has to pay for the good it has received from the supplier.



The number of days in which the payment has to be made for the business entirely depends on the working relationship between the supplier and the buyer. If the buyer has been maintaining a good reputation and has always being paying on time, the supplier may also go a little easy on the buyer by giving him enough time to arrange for the funds. Most businesses only exercise this source of finance when all their sources of finance are have been used up. In this source of finance, funds are generated by selling unused fixed assets of a business or assets that the business is not making full use of, which may include extra machinery, buildings and vehicles. By selling the unused fixed assets, the business is able to generate enough funds to meet its requirements. In 2010, LukOil used four sources of finance to meet their requirements which were, Trade Credit, Sale of investments, Sale of property and Sale of its subsidiary companies. To generate funds to meet its short term obligations, LukOil had to sell its short term investments, which included bonds and other cash equivalents. In addition to that, LukOil also sold some of its subsidiary companies to generate enough cash for the company so that they don’t have to arrange for a bank overdraft or short term loans to pay for the expenses. The company also sold some of its property that it had bought long time back for expanding purposes, in order to generate cash to meet the short term obligations of the company. On the other hand, the primary sources of finance that were used by Premier oil to finance its expenses were Trade Credit, Sale of unused assets and Sale of investments. Premier oil asked their suppliers to extend the payment time given to them so that they meet their other short term expenses first, and then, when they have enough funds, the suppliers will be paid. This helped in solving the problem of meeting short term obligations for Premier Oil. Another source through which Premier Oil arranged for funds to meet its short term obligations was sale of its unused fixed assets, the assets that the company had in surplus. This included sale ...Download file to see next pagesRead More
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