The overall sentiment of investors towards the asset class corporate bonds is mirrored in mutual fund flows. Monthly and weekly statistics, for example, from Investment Company Institute, AIG and Trim Tabs, track the net flows into the major asset classes and their subcomponents. They also give an indication about the portion of cash held in mutual funds. The published numbers can help to explain movements in credit spreads that are not directly related to changes in the fundamental environment for credit. For example, they partly reflect risk appetite of investors. This is especially true, when looking at flows into high-yield bond funds. Major shifts in the asset allocation of institutional investors can also be observed from the data. Yet, published information on mutual fund flows tends to be behind the curve, in other words it is a lagging indicator for the activity of market participants and thus for credit spreads. But the analysis may help to spot long-term trends in the relative attractiveness of different asset classes.
Category Archives: ledgers
The flow of your credit funds
Substituted equity by debt
In the last 20 years there were two periods, when US companies substituted equity by debt, especially by issuing corporate bonds. Consequently, between 1984 and 1990 and in the second half of the 1990s leverage rose dramatically. It also stands out that there were various periods when banks’ lending standards were extremely restrictive and one period, namely since 2000, when activity in the commercial paper market slowed down. Both events spurred corporate bond issuance in the past. If the usual pattern of the credit cycle holds, equity buybacks remain subdued until the economic expansion gains ground. As long as companies are willing to repair their balance sheets, net corporate bond issuance is also expected to be low. The analysis of the maturity structure of outstanding US and Euro corporate bonds shows a massive amount of redemptions for 2004 and 2005. On the other hand, while supply should remain weak during this period, demand for US financial assets by foreign residents is expected to remain strong. It is primarily driven by European investors and Asian central banks that pour huge amounts of money into the US capital market. A potential shift in the balance of supply and demand, however, is an important technical factor for the outlook for corporate bond spreads.
What were you thinking when you bought that fund?
Seeking help, you may approach a broker to recommend funds. Unfortunately, regret is likely to follow. A broker’s main interest is in loads and other commissions from frequent mutual fund sales. Loads of 5.75 percent are common. On a $10,000 investment, you are paying $575. You can buy an entire financial plan from a fee-only financial planner for less. If over the years you buy $100,000 of mutual funds, you will pay loads of $5,750. The sum of $5,750 buys several lifetimes of financial plans complete with tax savings ideas, estate planning tips, and zero-load mutual fund picks. However, unless you ask specifically and insist on an answer, you will not know the dollar amount you are paying for the privilege of buying a mediocre fund. Loads can be paid on purchase of a fund (a front-end load) or on the
sale of the fund (a back-end load) or both. A broker will use confusion and complexity against you.
What are the Advantages of Automated Accounts Payable
Many companies have added automated A/13 files to their general ledger systems. Most systems automatically track and report payables and provide summaries of amounts owed each vendor.
All in all, life becomes much easier with an automated system—providing the accounting department:
- Sets up vendor files properly.
- Sets up the A/1′ subledger to default to the general ledger.
- Establishes default files that categorize and track specific types of amounts owed and payments due.
The automated system includes the same types of information listed in the manual file, such as date of transaction, name of vendor, description of purchase, amount owed, and terms of payment. Using that data, the automated system will send the necessary information to the A/1′ subledger, which then batches all payables by entry date and balances the batch to the general ledger account.
What are accounts payable? – part 2
Structured similarly to A/R, ACCOUNTS PAYABLE is another subledger that feeds the general ledger with summaries of more detailed information. Information about disbursements flows through the ACCOUNTS PAYABLE system from sources both within and outside the company and travels up to the general ledger to become part of your company’s overall financial picture.
A well-designed and well-managed accounts payable system will reliably track the amount owed each vendor and when to pay based on agreements with that vendor. The system keeps a running tally of amounts paid so it can be checked against budget. It also is the system that provides the necessary information for generating your company’s 1099 statements (for reporting amounts paid to suppliers).
guidelines your collection staff should follow when dealing with debtors – part 4
At all times, maintain a professional, unemotional demeanor. If the collection efforts turn personal, your collector loses his or her professional leverage, destroys any spirit of cooperation, and may frighten the debtor away. Keep it professional, have a plan, and know the options.
And, if all else fails, sue the debtor for the amount owed. Good attorneys will counsel against spending more on legal fees than the company stands to collect. But even a small claims action will signal to the marketplace that the company means business.
However, winning a judgment is one thing. Collecting from a debtor who has no money… well, you’ve heard the story about getting blood from a stone? Learn from that.
guidelines your collection staff should follow when dealing with debtors – part 3
Elicit a promise to pay by a certain date. Debtors, like everyone everywhere, work better with a deadline. If it’s a due date mutually agreed to by the company and the debtor, the joint ownership often will elicit greater allegiance toward the company than it will for others waiting for payment. If the debtor’s resources are limited, this becomes a very important strategy.
Follow up when payments aren’t made. All of this will be for naught if there’s no follow-up. No matter how cooperative the company may be, the debtor must understand that the bottom line is to recover the debt. Despite preliminary work, a few reminder calls may be necessary. They can be very effective.
Maximizing Your Collections Efforts – part 1
The first thing to realize is probably the most important rule of bad debt collection: the collection effort begins before the sale is made.
If you wait until a debt goes bad and the debtor goes south, the likelihood of collection is low. But if the sales person takes time to qualify the account, check bank references, and otherwise ensure this person or firm is a quality company with a good record, then fear of bad debt down the road is greatly reduced.
Managers can help the effort by making sure that the sales person is financially respon-sible for that account, by limiting his or her ability to earn commission on any sale that goes bad. That type of incentive will make all the difference in the world.
A Guide to Tracking Receivables: Reports maximizing the company’s financial potential – part 1
The ACCOUNTS RECEIVABLE system can be used to generate a lot of reports. All have value, some more than others, but all take time and resources to complete. The following reports help maximize the company’s financial potential:
Receivables turnover. The faster receivables turn over and amounts owed are converted into cash, the better. ACCOUNTS RECEIVABLE turnover rate is calculated by dividing net credit sales by the average of accounts receivables. If the turnover rates of both accounts receivable and accounts payable match, so much the better. If the ACCOUNTS RECEIVABLE turnover rate exceeds that of payables, fantastic! That means money is coming in faster than it’s going out. And it doesn’t get any better than that.
Liquidity. The relative liquidity of an ACCOUNTS RECEIVABLE portfolio determines the quality of that portfolio as collateral for loans. The higher the liquidity, the greater the value of that portfolio. Measure liquidity by the number of sales days tied up in ACCOUNTS RECEIVABLE: days of sales in ACCOUNTS RECEIVABLE = 365 / ACCOUNTS RECEIVABLE turnover rate (The ACCOUNTS RECEIVABLE turnover rate is the net credit sales divided by the average of accounts receivable, as calculated above.)
How to Make Entries to the Accounts Receivable: Recording Returned Merchandise
In most cases, merchandise returns involve four steps. First, the merchandise is checked against the invoice, inspected, and marked to be put back on the shelves. Second, the amount to be credited is verified. Third, credit is given to the customer returning the merchandise. Fourth, the amount of the credit is posted to the customer’s account. Smaller companies have the advantage here. The larger the firm, the more challenging it is to keep track of every returned box, bag, and barrel.
Think about the last time you returned merchandise that you’d bought on your store credit card. How did that transaction go through the system?
You probably watched as the sales clerk took your sales receipt, inspected the merchandise, verified the amount, then made a note on the receipt and set it aside. But you didn’t see the following steps in the accounting process, as the accountant:
- Reduced the balance in the ACCOUNTS RECEIVABLE subledger with a credit
- Reduced the general ledger accounts receivable with a credit and sales returns and
allowances account with a debit - Increased the inventory account with a debit All that work just to keep you a happy customer!
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Recent Posts
- Credit informational asymmetries
- Adverse selection in a loan model
- Conditional credit expectation rule
- A credit discriminatory pricing rule
- Types of bank capital represent its own credit risk class
- Different degrees of loans subordination
- General fluctuations of credit spreads
- Investors require a premium for taking on credit risk
- Lagging indicators of credit quality
- Selection of your credit spread class
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