Professional Documents
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Where the borrowing is to increase the assets , the bank must ascertain whether
the purpose is to finance fixed assets or non-current assets. Where a customer
requests an overdraft to finance day to day trading, the Bank must ensure that
that is really the case because a customer may request for day to day trading
advance while the cause of the need would have been the purchase of a fixed
asset.
100. 120.
Fixed Assets 00 Capital 00
30.0 Current 10
Current Assets 0 Liabilities .00
130. 130.
00 00
On 1 January 2007, A purchases a fixed asset for GHC 50, utilizing proceeds from
debtors and short term loans. The position would be as follows:
Balance Sheet
150.0 120.
Fixed Assets 0 Capital 00
Current Current 60
Assets 30.00 Liabilities .00
1
180.0 180.
0 00
As a result of this decision, current liabilities now exceed current assets, giving a
current ratio of less than one. Had the facility been used to finance current
assets e.g. stocks or debtors, the current ratio may have remained unchanged.
Stocks
Overall debtors
Overall increase in business volume through increasing inventories and
stocks.
A business may seek finance for stocks when it has received a firm order from
clients and the client will only pay after the order has been delivered. A bank
overdraft would be suitable in this instance since the client will pay our
customer as soon as the order is delivered, bringing the account into a credit
position.
Businesses may also decide to build up stocks in anticipation of seasonal
sales e.g. building up stocks for Christmas sales.
Purchasing of stock may also be speculative, either taking advantage of a
good bargain or speculating that there would be a surge in demand in the
near future. This tends to be a very risky affair and should be examined
critically before any commitment is made.
2
Where the business wishes to build up stock levels permanently without any
of the above reasons, but merely to maintain a higher level of stocks, the
overdraft would not be suitable.
The bank must exercise caution in these circumstances and must only grant the
request if it is to maintain sales e.g. by providing the funds lost to finance normal
inventory purchases.
Debtors - 20 % of 20,000.0
sales 0 -
22,000.0 22,000.0
0 0
Balance Sheet
3
25,000.0
sales 0 -
27,000.0 27,000.0
0 0
When a business increases its sales turnover, it will definitely require increased
investment in inventory and debtors to maintain the increased turnover. Trade
creditors may also increase as a proportion of sales.
Sales
100,000.
2006 00
2007 120,000.
(projected) 00
Balance Sheet
Current Current
Assets Liabilities
15,000.
stocks 5,000.00 Overdraft 00
15,000.0
Debtors 0
Cash 3,000.00
23,000.0
0
53,000.0 53,000.
Total Assets 0 00
4
If sales increases by 20 %, if the percentage to sales ratio for stocks and debtors
is maintained at the same ratio as at the end of 2006, the projected balance
sheet would be as follows:
Balance Sheet
Current Current
Assets Liabilities
15,000.
stocks 6,000.00 Overdraft 00
18,000.0
Debtors 0
Cash 3,000.00
27,000.0
0
Financing 4,000.0
Need 0
Tax liabilities
Reduction in the volume of trade creditors
Tax Liabilities
5
It is normal for a business to seek funding for the payment of income tax of
employees, VAT or end of year corporation tax. Source of payment should be
proceeds from day to day trading. However, the bank should find out why the
business did not set aside funds to pay the tax.
Where the tax is overdue however, the bank should exercise caution because it
is obvious the business will not be able to generate the required funds from
operations to pay the tax.
Creditors
Where the facility is required to pay a supplier who is pressing for early payment
it may be because the business is falling behind on payments or that the
company itself is desperate for money. In these situations, the bank should
decline the request because obviously cash generated from trading will not be
sufficient to pay off the facility.