Concept of Credit Policy The discharge of the credit function in a company embraces a number of activities for which the policies have to be clearly laid down. Such a step will ensure consistency in credit decisions and actions. A credit policy thus, establishes guidelines that govern grant or reject  credit to a customer, what should be the level of credit granted to a customer etc. A credit policy can be said to have a direct effect on the volume of investment a company desires to make in receivables. A company falls prey of many factors pertaining to its credit policy. In addition to specific industrial attributes like the trend of industry, pattern of demand, pace of technology changes, factors like financial strength of a company, marketing organization, growth of its product etc. also influence the credit policy of an enterprise. Certain considerations demand  greater attention while formulating the credit Continue reading
Business Finance Terms
Credit Management – Managing Trade Credit and Accounts Receivable in Business
“The purpose of any commercial enterprise is the earning of profit, credit in itself is utilized to increase sale, but sales must return a profit.” –  Joseph L. Wood The primary objective of management of receivables should not be limited to expansion of sales but should involve maximization of overall returns on investment. So, receivables management should not be confined to mere collection or receivables within the shortest possible period but is required to focus due attention to the benefit-cost trade-off relating to numerous receivables management. Principles of  Credit Management In order to add profitability, soundness and effectiveness to receivables management, an enterprise must make it a point to follow certain well-established and duly recognized principles of credit management. The first of these principles relate to the allocation of authority pertaining to credit and collections of some specific management. The second principle puts stress on the selection of proper credit Continue reading
Debt Instruments – Meaning, Objectives and Features
The debt markets today are a major source of financing than the banking system. It is any market situation where debt instruments are traded. It establishes a planned environment where the debts are traded amongst the interested parties. The debt markets are known by other names based on the types of instruments are traded. For example when municipal or corporate bond are traded, debt market is called bond market whereas if notes or securities or mortgages are traded market is called credit market. The debt market is three times larger than stock/equity market. The debt markets are categorized into two other markets called money market and capital market. Money market is a subsection of the fixed income market. It specializes in short-term debts with the maturity of one-year. Capital markets specialize in long-term debts. It is a market in which financial instruments are traded by the institutions and individuals. Institutions Continue reading
Lease vs Hire Purchase
The concept of leasing can be understood by comparing the lease to the purchase of a specific asset. If a firm wishes to obtain the service of a specific asset, it has two alternatives: Purchase or Lease. To purchase the asset, the firm must payout a lump sum or agrees to some type of installment plan that involves incurring a long term liability. Leasing the assets, on the other hand, provides the firm with asset’s services without necessarily incurring any capital liability. Leasing is a source of financing as it enables the firm to obtain the use of assets in exchange for agreeing to pay lease rentals. In case of leasing, the asset is handed over by the lessor to the lessee in return for a lease rental. The ownership and the title to the assets remain with the lessor. The lessor, however, recovers the cost of the assets as Continue reading
Fixed Capital
Fixed capital means the portion of the capital, which is meant for meeting the permanent or long-term needs of the business. In other words fixed capital is required for the acquisition of those assets that are to be used over a long period. So,  Fixed capital  is an alternative term for  fixed assets. Fixed capital is required for acquisition of the following assets: Tangible assets such as land, buildings, plant and machinery, furniture and fittings, etc. Intangible assets such as goodwill, patents, copyrights, promotion, cost, etc. It should be noted that the fixed assets  couldn’t  be withdrawn from the business without disturbing the normal working of the undertaking. It is, therefore, necessary that sufficient funds are raised for acquisition of fixed assets. These funds are required not only while establishing a new enterprise but also for expanding, diversifying and maintaining intact the existing enterprise. Assessment of Fixed Capital Requirements The Continue reading
Foreign Capital
Foreign capital or investment has become significant part of sources of funding for various projects in every country. This source of funding has received the attention of both the government as well as the corporate sector that there has been increasing reliance on this source for planning and execution of projects by the government as well as the corporate sector. Foreign capital can come into a country in different forms. Let us first understand these forms of foreign capital before discussing the need for foreign capital. Forms of Foreign Capital Direct Entrepreneurial Investment: In this form of foreign capital, the foreign investors can start a company abroad mainly for the purpose of establishing its branches and subsidiaries in other countries. For instance an American business group may invest in a new project in India directly and start its own affiliate or branch or even a subsidiary. Sometimes, the investors abroad Continue reading