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Monthly Archives: November 2016

What is Trade Finance ?

Banks offer trade finance products to traders in order to facilitate the smooth transaction of trading, and such trade finance products can be bought by a trader for an agreed fee. What is trade finance? Trade finance denotes the items used to finance a trade deal, and the term encompasses both domestic and international trading deals. It takes a seller and buyer to enact a trade transaction involving goods and services and intermediaries like banks facilitate them by financing them.

In a trade transaction, a seller (or exporter) would expect the buyer or importer to pay for the goods that are to be shipped to them, in advance. Likewise, the importer (or buyer) would want to receive the entire consignment in full before paying for it. Here a stalemate or standoff can take place, but the situation is avoided if a bank steps in between and assures the seller of their payment by providing them with a letter of credit which will empower them to draw the payment by producing documents such as a bill of loading after they have dispatched the goods to the buyer’s destination. The seller (or exporter) can also get a loan or advance by producing the export contract to his bank.

Davenham Trade Finance UK uses several trade financing tools to facilitate their clients, and these include letters of credit, bank guarantees, discounting of bills, trade credit insurance, documentary collection, factoring or forfeiting. Some of these products are specially designed to get additional funding on top of traditional financing. In the chain of trading between two parties, there is always the element of risk, and it is only secure trade finance which can guarantee the secure movement of trading goods. Modern communication facilitates the tracking of consignments and ensures that the deals are concluded successfully.

Risk mitigation has evolved to a great extent giving birth to advanced finance models. These largely reduce the risk of paying the exporter in advance without upsetting the balance of the importer’s financial status. There is a huge demand for these advanced trade financing tools, as it allows flexible and voluminous trades to take place. Letters of credit and Bank guarantees are the two common trade financing models used by traders around the world. A trader can choose one of these two methods or others mentioned above, to conduct a trade transaction to import safely the goods they have ordered from a trader operating in a remote place.

Way to Become a Finance Director

The finance department is one of the most important departments in any type of organization. This department has to handle financial transactions of the firm and plan on investments and raising of funds for funding ongoing projects. As no project can be completed without money, the job of a finance director assumes further importance. Finance directors work in the areas like resource management, strategic planning, preparation of a financial budget for the financial year, supervising company’s financial performance and preparing financial reports for outside agencies like creditors and shareholders. Ensuring that the firm’s asset quality is high and debt levels are comfortable, are also some of the responsibilities of this job. Being the leading person in the department of finance, the finance director has to form teams, assign work and help in planning as and when they need. In short, the ultimate aim is to make sure that the firm achieves its financial goals or objectives in a planned way.

High School Preparation
Sincere efforts taken during this stage of one’s educational career pays off greatly. So, take special effort on subjects like economics, finance, mathematics, English and computer science while you are in high school. Get excellent grades so that you are not denied admission to top business schools to get deeper knowledge of finance.

Get Your Graduation Degree
Getting a graduation degree in accounting or finance is essential to pursue this profession. If you look at the track record of the Chief Financial Officers (CFO’s) of top companies, you will find that all of them have passed from top business schools. So, you need to try to do your MBA in accounting or finance from the top business schools in the US. As a student of finance, you should have ability in the following areas:

  • Financial management
  • Managerial economics
  • Management accounting
  • Costing and budgeting
  • Preparation and analysis of financial statements
  • Mergers and acquisitions
  • Fundraising through different routes

During the course of your study, you will be taught these subjects by expert faculties, hard work and passion for knowledge can lay a strong foundation for a successful career in finance.

Intern at a Major Finance Firm
During the business management course, students have to do their summer internships in financial and banking giants. Here, they get practical work experience and can apply their classroom knowledge. You will need to have good educational record to get internship at top firms in investment banking and asset management. A successful internship can help you get final placement in a top firm after you compete your course.

Become Auditor/Accountant/Finance Associate
After you complete your university education, you need to work as an auditor/accountant (junior level) initially for a few years. Then, with proven ability, you can become senior accountant or senior business analyst.

Become Assistant Finance Controller
Becoming assistant financial controller/assistant manager would be your next target after gaining experience in accountancy and auditing. By working at a managerial position, you will be able to sharpen your business skills and prepare yourself for future challenges. It would take around five years to become assistant finance controller.

Enter the Senior Management
To become a finance director, you first need to enter the senior management of the company. This is possible after gaining around ten years of experience in the field of finance. As a senior management professional, you will be involved in strategic planning, decision-making, chalking out expansion plans and fundraising. After spending some five to ten yeas in senior management position, you can then be eligible for this position.

Financial Management Analysis

This analysis deals with the calculated and predicted cash inflow and outgoings. The analysis is directed towards the study of the effect of existent funds on managerial objectives. It handles everything, right from procuring the funds to effective utilization of the same. Dedicated analysis handles procurement of funds from multiple sources, and since the funds are from different sources, they naturally need to be addressed, considering the difference with regards to the potential risk and control.

Tips

This management practice involves the optimum use of funds issued via equity, especially in the case of a business. This source is the best from the risk point of view since there is no involvement of any repayment. Management of business funds should ideally capitalize on equity capital, in spite of it being the most expensive source of funds. Furthermore, it should also involve calculation of risk, cost and control, and maintenance of the cost of funds at minimum. This is done with the intent of establishing a proper balance between the involved risk and optimized control.

Tapping Foreign Investments
In today’s competitive business world, mobilization of funds is very important. The implications play a very significant role in the overall growth of the venture. Financial management involves the raising of funds through the domestic and foreign market. When considering overseas solutions, direct and foreign institutional investments are major resources to tap, in order to raise the required funds. This whole mechanism designed for effective procurement of funds has to be periodically reviewed and modified, understanding the changing requirements of foreign investors.

Utilization of Funds
The ultimate goal cannot be addressed or achieved without first designing a strategy to ensure the proper utilization of funds. This helps to evade situations in which the funds remain idle or lack of profitable utilization of funds in hand. When availing of funds for the business, it is important to understand the involved cost and risk factors. Wastage of funds will only result in the business objectives not being met and ultimately, loss. The funds existent within the business should be critically reviewed from time to time and employed properly and profitably.

Scope and Extent
It has become imperative to address sound financial management in all types of organizations to guarantee efficient use of all resources. Research reveals that many firms liquidate because of mismanagement of funds and not, as it is commonly believed, because of obsolete technology or the lack of skilled labor. It is, in general, designed and customized according to different client needs to optimize output from the assessed fund input. In a situation where resources seem scarce and the demand for funds is high, its proper utilization is an absolute necessity.

The objectives of efficient financial management include maximization of profit. However, profit maximization is a limited objective and if it becomes the sole focus, then the approach only leads to more problems. This aspect must take into consideration, the relationship between risk and profit and work towards achieving a balance. The value of a business is analyzed on the evaluation of the stock market price. Thus, all in all, this financial practice should take into account, present and expected future income and the dividend policy of the firm to come up with a near-perfect understanding of the company’s progress potential.

Steps to Long-term Financial Planning

Step 1: Let us take the example of a coffee shop, where a financial planner has to find legitimate answers to 4 questions, namely:

  • Why should we produce a specific item on the menu card? (consider cost of production and sales price)
  • When should we produce such an item and for what time duration? (bear in mind, seasonal costs, inflation of raw material prices)
  • Where should we produce the item: right in the shop or some production center? (consider transport cost, nature of goods, and selling cost)
  • How should one produce the item, manually or mechanically? (consider equipment and personnel cost)

Step 2: The second step is to assess your business environment. In this step, surveying the competitors’ performance, pricing, and distribution is an absolute necessity. In such a scenario, you may also prepare a cost sheet of the financial features of production, namely the money that you would have to invest as a manufacturing cost, its sales cost, and the profit that it would yield. Logically, the sale price should be more than the cost price, and the return-over-asset ratio/return-over-investment ratio should be healthy. While finalizing these three figures, you will need to take into consideration three important aspects:

  • Average spending capacity of your customers
  • Your competitors’ quality, quantity, and price
  • Popularity of the product, potential market, customer retaining capacity of the product, etc.

Though the trend of such products is more experimental in nature, they might become full-time, public favorite products; hence, it is also important to make a financial provision to recover losses that arise in the experimental period, until the product establishes itself in the market.

Step 3: The third and fourth step are more analytical in nature and from the finance point of view, they are also quite expensive. The idea that you need to implement in the third step is allocation of resources in such a manner that you tend to make a genuine profit in sales during the long run. In this step, you will be using and analyzing cash flow statements on almost a daily basis. The key is to have uniform cash outflows for consecutive days/months/years. Cash outflow is typically all expenses and losses. Losses are quite uncontrollable, but expenses are surely controllable. Hence, search for raw material sources, manpower, and production processes that will help you to maintain uniform and low per-unit cost for the item/product. For example, have regular suppliers, who will supply at an agreed and uniform cost. This uniformity will eventually come in handy to curb and control unexpected losses, and will also help you to keep a good hold over the market.

The second part of the third step is making monetary provisions. This is absolutely essential due to the fact that no business is risk-free. Such provisions include advance to the raw material supplier, insurance, provisions for bad debts, extra services, etc.

Step 4: Retain, sustain, and entertain; this step is quite an advanced one, and typically includes many different aspects that aim at retaining the customers. The first important function of this step is to generate regular data and cash flow statements. With the help of these statements, you will realize whether that very item on the menu is proving to be profitable or not. At the same time, you also need to maintain a statement that records cash inflows and outflows over a longer period of time (in months or a quarter). Thus, you will realize what is profitable for your business and what your customers want.