FINANCING

CURRENT ASSETS
 Behaviour of current assets

Fluctuating current assets

Current assets

Permanent current assets

time
 Spontaneous sources of
financing current assets
• Accrued expenses

• Provisions

• Trade credits
 Trade credits
Obtaining trade credits

 Quantitative measures
• Good track record of profitability and
liquidity
• Record of prompt payment
 Qualitative measures
 Cost of trade credits
• Explicit cost – opportunity cost
• Implicit cost – cost of trade credits
• Higher the discount rate higher the cost of
trade credits
• Smaller the spread between credit and
cash discount period higher the cost of
trade credits
 Cost of trade credits
• Rate of discount / 1- rate of discount x
number of days in a year / (credit period –
discount period)
 Relation between cost of trade
credit and credit terms
Credit terms Cost of trade credits
2/10, net 30 36.72
2/10, net 45 20.99
2/10, net 60 14.69
1/10, net 30 18.18
1/10, net 45 10.39
1/10, net 60 7.27
2/15, net 30 48.98
1/15,net 30 24.24