Management Of Overdraft Facilities

It is an arrangement under which credit is extended up to a maximum amount against which customer of current account can write checks or can make withdrawals.
Revolving loan is the most common type of overdraft facility where deposits are available for re borrowing and the interest becomes chargeable only on the overdraft balance.
Overdraft can even be secured by an asset or any property and in this case the lender has every right to foreclose the collateral if there is any default.
Calls happen usually on the following conditions.
When credit rating of borrowers falls
Borrower is likely to default as per the lender's instances
It is a short-term funding mechanism which is designed in order to help a business through contingencies by allowing spending more money than one have in his bank account.
It even bridges the gap between incoming and outgoing funds.
A bank overdraft isn't good for every business however there are certain features that are required to be considered before determining whether the overdraft is good or not and these features are:
' The amount of the overdraft depends on cash flow, the timing of receipts and payments and seasonal trends in sales.
' Interest becomes chargeable only on the overdrawn amount which is generally over the base rate.
' Overdrafts are temporary form of funding for short term requirements.
' Secularization might be required depending upon the type of overdraft facilities.

Managing overdraft require keeping our account dynamic which requires restructuring of finance and revising the source of funding. It even requires us to ensure our limit and to knowhow much we are spending and what is their in our accounts .
Overdraft should only be used for short term findings and fees should be avoided.
Avoiding overdraft fees
' Stay within our limit to avoid mounting fees.
' Never ignore fees as they can go on mounting and mounting
' Inspection and regular scrutinizing of your payment timings.

5.2 TERMS AND DUTIES
Different bank offers different limits and the interest rate also differs. Not only this, the terms and conditions also varies and thus it becomes the responsibility of the finance team to ensure that the facilities of the banks are utilized properly considering the needs and requirements of the firms so that the cost incurred is least and the maximum profit gets generated.
For this, the company prepares the daily interest amount to be paid for overdraft loans and sees how they should fluctuate and manage their money in accounts maintained at the different banks so that they pays least interest in totality and manages their overdraft limits. This requires shuffling or shifting of money from overdraft account of one bank to other banks and maintains the overdraft limits as desired.
The duties of the finance team comprises of:
' Comparing the overdraft limits of different banks
' Comparing the interest rate for loans charged by the different banks
' Deciding the bank to be used for payment mechanism depending upon the amount and interest rate
' Managing the daily required balance in the appropriate accounts if possible and if not see that the interest paid becomes least.

CHAPTER: 6 COSTING
Costing is the method of determination of total cost of goods and services. In other words, it refers to the collection, allocation, apportionment and absorption of costs into products and services. It also involves analysis and control of costs, etc
Costing is the whole set of procedures that involves classification, recording and appropriate allocation of expenditure for the determination of the cost of products or services, and for the presentation of suitability arranged data for the purposes of control and guidance of management.
It is the systematic set of procedures for the recording and reporting measurements of the cost of the manufacturing goods and performing services in the aggregate in details.
There are various components of cost that are required to be aggregated for the determination of costing of any goods and for the imported goods too there are various expenditures that are to be loaded to determine the appropriate cost. All these expenditures are related with purchase expenditures and expenses incurred for bringing in the materials to the warehouse of the importer be it freight on purchase, clearing charges, custom duty and the like.
6.1 PROCEDURE OF COSTING OF IMPORTED GOODS
Import costing can be dangerous, as blunder can have a negative impact on your margin, and we could end up running our import operation at our own costs

1. Get your product purchasing cost
At first we are required to ascertain what is included in the price that is obtained from the supplier and ensure that the quotation is all inclusive. Also check whether packaging or labelling is included or not which mistaken usually. Also is price which is taken is FOB or is just exworks.
2. Calculate your freight cost
At first decide what freight mode you need. The 3 main alternatives are: sea, air or the combination of both. After having decision regarding the mode of transit of goods, we arrange the quotations and check the entire details whether everything is included. Basic freight cost, taxes, and other relevant charges even insurance should be included in the quotations submitted by the freight forwarders.
Since importing products is subject to custom duties levied by the country where you plan to ship your goods, we must know in which category your products fall in, under the Harmonized Tariff Schedule (HTS codes). We can seek the help from Forwarder; local custom bureau
Custom duties apply to the total value of your imported goods as they enter the territory (purchasing cost + freight + insurance).
4. Be sure to include all costs
Include all the side costs which may originate from quality control or testing or the specific logistics operations or additional costs incurred at the place of the product manufacturing like designing or molding
5. Add up your margin
Here it is required to add certain percent to the total aggregated costs to cover for an unexpected fluctuation in currency movement or price rise. That is why it is always valid to keep the sales quotation valid for 30 days.

CHAPTER: 7 CASH MANAGEMENT
7.1 INTRODUCTION
Cash management is financial tool that deals with management of cash including the collection and disbursement of cash and involves assessing market liquidity, cash flow, and investments. It is thus the financial management tool which corporate uses in order to accelerate the collection of receivables, control payments to creditors, and efficiently manage cash. Successful cash management requires not only avoiding insolvency but also requires to reduce account receivables (AR), increase collection rates, select appropriate short-term investment mechanisms,
Large corporations usually collect funds from many different accounts into a single Concentration and invest excess funds in the money market and while making payments to creditors, they control the outflow of funds by timing payments with the receipt of invoices A frequently used tool in cash management is Controlled Disbursement in order to match the collection of accounts receivables against payments to the partners.
Successful cash management requires establishing realistic projections, regular monitoring of collections and disbursements and also adopting suitable investment strategies.
Cash management is all about following activities:
' Receivables management
' Payables management
' Determining the optimal cash balance
' Investment of surplus cash or borrowings in case of deficit

7.2 Cash Collection and disbursements
Concentration of cash into single account is the important mechanism for efficient cash collection. After the money that has been received by the supplier, they are concentrated in single bank accounts through different mechanisms like ACHs, wire transfer, checks, etc.
The effectiveness of the cash collection depends upon the following things:
' Location of the customer
' Costs of processing payments
' Size and schedule of the payments
' collection procedures adopted
' Prevailing interest rate which can be earned on surplus funds
Receivable management also depends upon the credit amount and the credit period extended. Therefore, the credit manager has to take decisions regarding the maximum credit period and the credit limits that is to be allowed to the customers.
In SARAWAGI GROUP, the customers were divided into various categories depending upon the amount of purchases they used to make and the credit terms were different for them categorically. This was determined keeping in view the past records of the customer, their present behavior and future prospects and long term benefits.
The efforts were made to reduce the average collection period which was 25 days in average to 20 days through quick billing and invoicing mailing system and cash collection system. Also by revising the credit terms and reducing the length of credit period and through discount facilities for prompt payment.
Disbursement of cash follows Centralized payment system in which all the expenses regarding payrolls and such are made by the head office through scrutiny. This method doe's take time actually the company follows controlled disbursements payments mechanisms in order to reconcile the collection of AR against AP...

7.3 Determination of optimum cash balance
Another important aspect of cash balance is determination of the optimum cash balance which is required by any business firms to maintain at any point of time so that they can manage the emergencies and their obligations as they arise. This is not an easy task but this all depends upon liquidity measures which are as follows:
' Cash to total assets ratio
' Current ratio
' Quick ratio
' Absolute quick ratio
Higher the ratios higher will be the liquidity and this determines the cash balance to be headwall this requires a relative in hand experience together with appropriate inflows and outflows projections. However, this also requires once to be very careful in determining the cash position as this may affect liquidity on one side and profitability on the other. Moreover, too much of idle cash may result in profitability decline and deficit on the other may affect the solvency of the firm. If the cash position goes above the predetermined cash balance, there is generation of surplus cash which gets invested in money market and during the case of deficit, short term lending is desirable.

7.4 Steps that can be followed for cash management
' Creation of appropriate and valid cash flow budgets
' Quick collection of dues through appropriate mechanisms
' Discounts and other benefits for the purpose of efficient and immediate collection of payments
' Scrutinizing of disbursements
' Liquidating of unused and obsolete inventory
' Minimization of operational costs if possible

7.5 Cash management services of banks used by the company
' Automated Clearing House
' Cash concentration services
' Wire Transfers
' Controlled disbursements
' Sweep accounts

Automated Clearing House
Company uses this method to pay to the employees and also to collect the funds from the customers. This is the electronic media of funds transfer between banks
Cash Concentration Services
Companies open various local bank accounts at different area from where they have to receive cash and make the arrangements with their primary bank to pull the amount from these local banks through ACH electronically to a single bank accounts.
Controlled Disbursements
The bank provides the information to the company regarding the disbursements made through their daily reports and invests the surplus money in the money market . Controlled disbursements are made by matching AR with AP.

Sweep Accounts
Through this, surplus funds from the bank accounts are moved to money market mutual funds and the very next morning they are again moved back to their accounts which allows company to reap benefits of interest.
Wire Transfers
It is an electronic transfer of funds done by a simple bank account transfer. Under this, the message is given to the receiving bank in order to make payments as per the instructions given. This even involves settlement instructions.

Source: Essay UK - http://ntechno.pro/free-essays/finance/management-overdraft-facilities.php


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