Ignacio Lezaun

English edition
2021

Fundamentals of Finance

1
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Contents of the course

1. The role of the Chief Financial Officer

2. Statement of cash flows
3. Working capital management
4. Short-term finance instruments
5. The time value of money
6. Conclusions
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Unit 4: Short-term finance
instruments

OBJECTIVES
◼ Managing Short-Term Financing with explicit cost

◼ Factoring

◼ Confirming

◼ Loans and commercial credits

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Unit 4: Short-term finance
instruments

INCOME STATEMENT

BALANCE SHEET CASH FORECASTS:

- Financial Budget
- Annual Treasury Forecast
- Liquidity Position
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Operational Financing Needs Model - Working
UNIT 3
Capital (WC - OFN)

ACCOUNTING
FINANCIAL
BALANCE SHEET
BALANCE SHEET
NET EQUITY AND
ASSETS
LIABILITIES

Net Equity NET ASSETS / CAPITAL

Non-current EMPLOYED
INVESTMENT
assets
Non Current Net Equity
Accounting Non Current
Inventory Debt
Working Assets
Current Capital Non Current
Accounts
Operating Current Debt Debt
Assets
Receivable
OPERAT.
Spontaneous FINANCING
Cash liabilities NEEDS Current Debt
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Operational Financing Needs Model - Working
UNIT 3
Capital (WC - OFN)

ACCOUNTING
BALANCE SHEET
NET EQUITY AND
ASSETS
LIABILITIES

Net Equity
Non-current 1 :: Financing Entities:
assets *** LOANS ***
Non Current 2 :: Other Creditors
Inventory Debt
1 :: Financial Entities:
Accounts Commercial Discount
Current Debt
Receivable Financial Discount
Spontaneous Factoring / Confirming
Cash liabilities 2 :: Other Creditors
Suppliers
Tax Authorities
Social Security
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INDEX

1. Spontaneous Financing (without Explicit Cost)

2. Non-Spontaneous Financing (with Explicit Cost)

3. What is Factoring?

4. What is Confirming?

5. What is a Loan?
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1. SPONTANEOUS FINANCING
(WITHOUT EXPLICIT COST)

This type of financing occurs when the creditor of the debt grants

a payment term for it, without this implying an increase in the amount of
the debt

TYPES of spontaneous financing:

 Suppliers
 Taxes Payable
 Social Security

Characteristics:
 Immediacy
 Free
 Flexibility
 1. SPONTANEOUS FINANCING 9
(WITHOUT EXPLICIT COST)

Cash Discount – Prompt payment

Term (n)
% Discount (d)

Discounted Amount (DA) Invoiced Amount (IA)

DA=IA x (1-d)
1. SPONTANEOUS FINANCING 10
(WITHOUT EXPLICIT COST)

Suppliers and discount payments

Example

A supplier offers a 3% cash discount to a Customer for a € 6,000

invoice to be paid by the customer within 60 days.

Calculate:

• The amount to be paid by the Client

• The cost of that financing
1. SPONTANEOUS FINANCING 11
(WITHOUT EXPLICIT COST)

Suppliers and discount payments

Example

A supplier offers a 3% cash discount to a Customer for a € 6,000

invoice to be paid by the customer within 60 days.

Calculate:

• The amount to be paid by the Client

6,000€ x (1-0,03) = 5,820€
1. SPONTANEOUS FINANCING 12
(WITHOUT EXPLICIT COST)

Suppliers and discount payments

Example

A supplier offers a 3% cash discount to a Customer for a € 6,000

invoice to be paid by the customer within 60 days.

Calculate:

• The amount to be paid by the Client

6,000€ x (1-0,03) = 5,820€
• The cost of that financing
6,000 – 5,820 = 180€
Annual interest applied: 3% x 12/2=18%
2. NON SPONTANEOUS FINANCING 13
(EXPLICIT COST)

• The financing that we generally obtain from Financial Entities with an Explicit

cost

• Types of financing:

 Commercial discount
 Financial Discount / Credit Lines
 Supplier Financing
2. NON SPONTANEOUS FINANCING 14
(EXPLICIT COST)

Elements to take into account when choosing one type of financing or

another:

• What is each instrument for?

• Flexibility for payment and cancellation
• Expenses of each instrument, commissions, interests, tax expenses
• Guarantees and compensation
• The limitations or conditions that the other party requires
• The impact on financial statements, especially indebtedness
 2. NON SPONTANEOUS FINANCING 15
(EXPLICIT COST)

Commercial discounts

Client 1

Client 2
Company Financial entity
Client 3

.
.
.

Client n
2. NON SPONTANEOUS FINANCING 16
(EXPLICIT COST)

Commercial discounts

Company presents to the Financial Institution

 Bills
 Promissory notes

Items to be negotiated with banks:

 Maximum amount of the line (total and limits by client)
 Authorized clients
 Contract period
 Interest Rate, Commissions.
 Advance payment term
2. NON SPONTANEOUS FINANCING 17
(EXPLICIT COST)

Financial Discount / Credit Line

Limit €

Company Financial entity

Freely available
12,000
10,000
8,000
6,000
4,000
2,000
0
Jan Feb March April May June July August Sept Oct Nov Dec
Limit Column1
2. NON SPONTANEOUS FINANCING 18
(EXPLICIT COST)

Financial Discount / Credit Line

 Items to be traded:

 Maximum amount of the line

 Contract period
 Interest rate (drawn, exceeded, undrawn
balance)
 Commissions (opening, cancellation, etc.)
 Guarantees
2. NON SPONTANEOUS FINANCING 19
(EXPLICIT COST)

Supplier Financing

Suppliers Issue Company requests

Supplier 1 Invoice financing from
financial entity
Supplier 2 Financial
Company
Supplier 3
entity

.
. Company pays
. suppliers

Supplier n
2. NON SPONTANEOUS FINANCING 20
(EXPLICIT COST)

Supplier Financing

 Items to be traded:

Maximum amount of the line

Contract period
Interest rate, commissions.
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3. What is Factoring?

A financial operation by means of which

a company transfers its collection rights (accounts receivable) to a third
party (bank or other specific financial entities) that will be in charge of
managing the collection. In return, the factoring company will pay the
amount of the assigned invoices, less a discount. Client Company pays
directly to the Financial
entity

Company transfers
Company issues invoices to financial
invoice to client entity
Client Company Financial
Financial entity
entity
pays to the
Company
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Types of factoring

1. With Recourse

The bank does NOT assume the risk of non-payment and can act

against the transferor company of the invoices in case of non-payment of
the client.

2. No Recourse

The bank DOES assume the risk of non-payment and cannot act against

the transferor company of the invoices in case of non-payment of the client.