Short and Long-term Financing Assignment Example | Topics and Well Written Essays - 2000 words

Short and persistent-term Financing - Assignment ExampleSainsbury plc uses different types of financing such as borrowing, wedge loans, term loans and justness funds to acquire needed cash.Long term finance is usually paid off after a long point in time of time such as 10-25 years. On the other hand, short term finance needs to be paid off within a year. Long term finance is acquired to fulfil a companys long-term funding needs whereas short term funds are used to finance companys working swell. Sainsbury relies on short term bank loans, bank overdrafts and short term notes for short term financing, and relies on equity shareholders funds, medium term notes, finance leases and loan striving for long term financing. The company relies on too much loan capital, which is mostly high pastime bearing in the long-term. High digestments of interest land the companys profits. Also, high loan capital weakens a companys credit worthiness and increases bump in future.Equity financing carries high cost because it is more risky for investors. However, equity financing derriere be used to generate huge capital and payment of dividends is not compulsory. On the other hand, debt financing requires fixed payment of interest compulsorily. Businesses cannot rely on one source of finance rather they endeavour to maintain a mix of debt and equity capital. Companies with high debt capital are considered as more risky and therefore, the cost of capital will rise as creditors will demand more return i.e. high interest because of high risk involved. High risk, high return for investors and high cost for the company. Evidence BWorking Capital Management- Sainsbury plcWorking capital can simply be delimitate as the amount of funds in excess of current assets over current liabilities. It is basically the sum of money which is left after keeping excursion the funds that are to be paid off to short term creditors. Working capital is used to finance a companys short term contr ast needs and expenditures Working capital has two major elements viz. the current assets and the current liabilities. It can be mentioned as Working capital = current assets-current liabilitiesIn order to analyse a companys working capital management, it is useful to calculate ratios such as current ratio, quick ratio, receivable turnover ratio and stock turnover ratio (see appendix I). All these ratios help to determine a companys working capital position. Current ratio shows the ability of a company to dally its short term expenses and obligations out of its current assets less current liabilities. Sainsbury plcs current ratio is 0.791 at the end of the year 2006 whereas it was 0.571 in 2005 and 0.831 in the year 2004. It shows that the working capital position of the company has declined by about 5% over the last three years. The company is able to pay off only 79p for every 1 borrowed. Quick ratio is a variant of current ratio. It is calculated on the basis of only the current assets that can be readily converted into cash, excluding inventory and prepaid expenditures. Sainsbury plcs quick ratio is 0.671 at the end of year 2006, 0.461 in 2005 and 0.67 in 2004. This room that the company is only able to pay off 67p for every 1 of its short term obligations out of its quick current assets.For efficient working capital management, it is very essential that the company is able quickly convert its receivables and inventories into cash. The receivable turnov