Short term finance sources Essay Example | Topics and Well Written Essays - 1500 words

Short term finance sources - Essay Example It is evident from the study that 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 loanâ⠂¬â„¢. 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. Sale of unused assets: 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, Lokul Oil used four sources of finance to meet their requirements which we re, Trade Credit, Sale of investments, Sale of property and Sale of its subsidiary companies. To generate funds to meet its short term obligations, Lokul Oil had to sell its short term investments, which included bonds and other cash equivalents. In addition to that, Lokul Oil 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 suppl iers 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 of property, offices, buildings, sites which were not profitable or were not generating enough revenue to meet the company’s demand. This source of finance helped in putting the idle money into use. Like Lukul Oil, Premier Oil also used sale of