Subject: Business Finance

Author: Mr. Ace M. San Gabriel

Editor: Mr. Jhune Michael D. Segismundo
Reviewer: Mr. Mark Paulo Y. Tanjente

WEEK 10
LESSON 7 – SHORT TERM FINANCING MANAGEMENT

Description of the Lesson:

Short-term financing options are tied directly to immediate sales; they are relatively easy to qualify
as long as the business has a positive cash flow or outstanding invoices to use as collateral. Cash
flow from operations may not be enough to keep up with growth-related financing needs. Firms may
\ prefer to borrow nor for their inventory or other short-term asset needs rather than wait until they
have saved enough.

Objectives:

At the end of this lesson, the student is expected to do the following:

1. Understand the concept of short-term financing management;
2. define and know the two major short-term spontaneous liabilities; and
3. learn the major sources of unsecured short-term credits and secured short-term

Day 1: Pre-assessment (What I know)

Direction: Choose and write at least three (3) current liability accounts on the box provided. (2 points
each)

1._______________________________

2._______________________________

3._______________________________

Day 2: Lesson Content (What’s new)

How was activity above? I hope you enjoyed answering it. Before we proceed with our lesson, I want
you to ask yourself the following questions.
1. How a company finances on a short-term basis?
2. What are different short-term financing sources?

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Now, let’s start our lesson.
A. Short-Term Financing

Spontaneous Liabilities - financing that arises from the normal course of business

- obligations of a company that are accumulated

automatically as a result of the firm's day-to-day
business

- an increase in spontaneous liabilities is normally tied to

an increase in cost of goods sold (or cost of sales),
which in turn depends on sales of goods or services

Two (2) major short-term of spontaneous liabilities:

1. Accounts Payable
2. Accruals

These liabilities are called "spontaneous" because they arise from changes in sales
activity, which are not directly controlled by the firm. A growth in sales is accompanied
by a rise in cost of goods sold (COGS) if the company is a product manufacturer or
increase in cost of sales (COS) if the company provides services. The upturn in COGS or
COS is due to increased production and labor activity to replace sold inventory or support
additional service sales. Accounts payable (for raw material and parts), wages payable
(for additional worker hours) and taxes payable (for greater pre-tax income)
spontaneously climb as a result.
The projected growth in spontaneous liabilities is an important component for
firms to consider as they manage corresponding accounts on the other side of the balance
sheet — current assets. Working capital, or current assets minus the current liabilities, is
a key part of funding ongoing operations of a firm. If the major components of current
assets such as cash, accounts receivable and inventory do not consistently and
comfortably exceed current liabilities, then a company may eventually find itself in a
challenging financial situation to meet its spontaneous liabilities.

B. Accounts Payable

Accounts payable is the major source of unsecured short-term financing for

business firms. They result from transactions in which merchandise is purchased but no
formal note is signed to show the purchaser’s liability to the seller.
The average payment period has two parts:
(1) the time from the purchase of raw materials until the firm mails the
payment and
(2) payment float time (the time it takes after the firm mails its payment
until the supplier has withdrawn spendable funds from the firm’s account).
Accounts payable management is management by the firm of the time that
elapses between its purchase of raw materials and its mailing payment to the supplier.
When the seller of goods charges no interest and offers no discount to the buyer for early
payment, the buyer’s goal is to pay as slowly as possible without damaging its credit
rating. This allows for the maximum use of an interest-free loan from the supplier and
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 will not damage the firm’s credit rating (because the account is paid within the stated
credit terms).
Short-term credit or financing is debt scheduled to be repaid within one year. In
general, there are three basic factors that should be considered in selecting a source of
short-term financing:
1. The effective cost of the credit source.
2. The availability of credit.
3. The effect of the use of a particular source of credit on the cost and availability
of other sources.
Day 2:
Application (What I Can Do)
Instruction: On your answer sheet, fill in the blanks to complete the statement.

Spontaneous Liabilities
These liabilities are called ______________________because they arise from changes in sales
activity, which are not directly controlled by the firm. A growth in sales is accompanied by a rise in cost
of goods sold (COGS) if the company is a product manufacturer or ______________________ in cost
of sales (COS) if the company provides services. The upturn in COGS or COS is due to
______________________ production and labor activity to replace sold inventory or support additional
service sales. ______________________ payable (for raw material and parts),
______________________ payable (for additional worker hours) and taxes payable (for greater pre-tax
income) spontaneously climb as a result.

Day 3:
Application (What I Can Do)
Instruction: On your answer sheet, enumerate the following:
What are three basic factors that should be considered in selecting a source of short-term financing.
1. __________________________________________________________________
2. __________________________________________________________________
3. __________________________________________________________________

Post-Assessment (What I Have Learned)

Instruction: In your thoughts, write a short essay about the topic “Managing My Accounts Payable”.
Please write your essay on the answer sheet provided and follow the KISS method (Keep It Short and
Simple)
Subject: Business Finance
Instructor: Mr. Ace M. San Gabriel
Student’s Name: ___________________________________________________
Course and Section: ________________________________________________

WEEK 10
LESSON 7 - SHORT TERM FINANCING MANAGEMENT
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 Answer Sheet

Day 1: Pre-assessment (What I know)

Direction: Choose and write at least three (3) current liability accounts on the box provided.(2 points
each)

1. _______________________________

2. _______________________________

3. _______________________________

Day 3:
Application (What I Can Do)
Instruction: On your answer sheet, fill in the blanks to complete the statement.

These liabilities are called ______________________because they arise from changes in sales
activity, which are not directly controlled by the firm. A growth in sales is accompanied by a rise in cost
of goods sold (COGS) if the company is a product manufacturer or ______________________ in cost
of sales (COS) if the company provides services. The upturn in COGS or COS is due to
______________________ production and labor activity to replace sold inventory or support additional
service sales. ______________________ payable (for raw material and parts),
______________________ payable (for additional worker hours) and taxes payable (for greater pre-tax
income) spontaneously climb as a result.

Valuing/Integration (What’s More)

Instruction: On your answer sheet, encircle which businesses have the qualification to be a BMBE
grantee in accordance with the law based on their ASSETS.
Post-Assessment (What I Have Learned)

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 Instruction: In your thoughts, write a short essay about the topic “Managing My Accounts Payable”.
Please write your essay on the answer sheet provided and follow the KISS method (Keep It Short and
Simple)

REMINDERS:

Things to remember as you accomplish this module:

1. Keep this module and notes inside your portfolio.
2. If there are any questions or clarifications, kindly send me a message through the
following:
 Call/text –09088143178
 Messenger – RCI Ace San Gabriel

Source: Financial Management (Book) by Payongayong, Luzviminda S., et.al.

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