ENGLISH FOR FINANCE AND BANKING
Unit
1: BANKS AND BANKING
Banks are closely
concerned with the flow of money into and out of the economy. They often
cooperate with governments in efforts to stabilize economies and prevent
inflation. They are specialists in the business of providing capital, and in
allocating funds on credit. Banks originated as places to which people took
their valuables for safe-keeping, but today the great banks of the world have
many functions in addition to acting as guardians of valuable private
possessions.
Banks normally
receive money from their customers in two distinct forms: on current account
and on deposit account. With a current account, a customer can issue personal
cheques. No interest is paid by the bank on this type of account. With a
deposit account, however, the customer undertakes to leave his money in the
bank for a minimum specified period of time. Interest is paid on this money.
The bank in turn lends the deposited money to customers who need
capital. This activity earns interest for the bank, and this interest is almost
always at a higher rate than any interest which the bank pays to its
depositors. In this way, the bank makes its main profits.
We can say the
primary function of a bank today is to act an intermediary between depositors
who wish to make interest on their savings, and borrowers who wish to obtain
capital. The bank is a reservoir of loanable money, with streams of money
flowing in and out. For this reason, economics and finances often talk of money
being liquid, or of the liquidity of money. Many small sums which might not
otherwise be used as capital are rendered useful simply because the bank acts
as a reservoir.
The system of
banking rests upon a basis of trust. Innumerable acts of trust build up the
system of which bankers, depositors and borrowers are part. They all agree to
behave in certain predictable ways in relation to each other and in relation to
the rapid fluctuations of credit and debit. Consequently, business can be done
and cheques can be written without any legal tender visibly changing hands.
Unit 2:
A BANK ACCOUNT
For the safety,
convenience and many other benefits, more and more people open a bank account.
An account is a record of a customer’s money transactions (deposits and withdrawals).
Its form is like the letter T with Debits on the left and Credits on the right.
An account can have either credit or debit balance. A credit balance is the statement of an account when more
money is deposited than withdrawn while a debit balance is when less money is
deposited than withdrawn. Every month account holders are given an account
statement showing the month’s transactions, consisting Date, Detail, Debits, Credits and Balance and pay an account charge, but if they can keep their account
in credit, this service will be free of
charge.
Banks will make a note of credit or debit entry in
customer’s account when they pay money in or out their accounts. When a
customer deposits $50 in his account, the bank credits this amount to the
customer’s account and at the same time debits
$50 to the bank’s account. This is an example of double entry.
Deposits on an account
may be demand or time. Normally, the demand deposit account
pays no or very little interest whereas the time to pays interest. The interest
rates paid by banks vary from bank to bank, depending on how long customers
leave their money in the bank: short, medium or long term. The longer the money remains in the bank, the more interest it earns.
With time deposits, account holders usually withdraw their money at maturity
date but they can take the money out of the account before the maturity date if
they want. In this case, some
interest will be lost.
A withdrawal slip
is usually used to withdraw money from an account. However, current account
holders can withdraw money from their account by writing cheques. In this case,
they do not need to write their names as the payee of the cheque, but write
“cash” or “self”.
To open an account,
the applicant is required to fill in
an account opening application form
and to deposit some money. An account can be opened for individuals or a
company. The former is the personal while the latter is the corporate or a
business account. In general, the
procedures of opening a corporate account are more complicated than
a personal one.
To close an account, it is necessary to withdraw all the balance
on it.
There are
different types of account to meet the various needs customers: current (checking), deposit and savings account,
sole and joint accounts, personal and corporate accounts.
Unit 3:
CHEQUE CLEARING SYSTEM
The process of
clearing may be defined as the transmission and settlement of payments between accounts
held at different banks or different branches of the same bank.
When a cheque is
paid into a customer’s account at a branch of a bank or other financial
institutions, it is necessary for the cheque to be sent to the branch on which
it is drawn in order to obtain payment. In effect the customer requests his
branch to “collect” the payment and
his branch is therefore known as the collecting branch rather than deal with
each cheque individually. The collecting branch uses the clearing system to
obtain payment from the branch on which the cheque is drawn.
Each branch sends
the cheque which is has accepted for collection to the clearing department of its own bank which then exchanges
cheques with other banks at the Clearing
House. These dealings, which involve two separate banks, are shown in the clearing statistics as inter-bank
items. When a collecting branch receives a cheque drawn on another branch of
the same bank, the cheque will not go to the Clearing House but it will be
exchanged in the Clearing Department of the bank concerned and will be processed
in the clearing statistics as an
inter-branch item. Cheques which are paid in at the branch on which they
are drawn do not need to be cleared and are processed “in house” within that branch. Cashed cheques are processed in a
similar way to other cheques, although a larger number of these will be “in
house” items where the customer is drawing cash from his own branch.
The clearing
system is also available to financial institutions which are not Settlement
Members of the clearings. Several hundred banks and building societies that
lend money which allows them to obtain clearance of cheques on behalf of
themselves of their customers. Within the clearing statistics banks having
agency arrangements are treated effectively as a branch of the Settlement
Members providing the arrangements.
Unit 4:
LENDING
The role of
lending at commercial bank in the United
State
This paper
provides the background information about commercial and industrial loans. Such
loans are used to finance temporary and permanent business assets. Lines of
credit and transaction loans are used for temporary assets and involving loans
and term loans are used for permanent assets. Accounts receivable, inventory,
and real property and equipment are the most commonly used types of collateral
for commercial and industrial loans. The maximum amount that national banks can
lend to any customer is limited to 25% of their equity capital. Most banks will
not risk too much on one customer. The amount that they will loan depends on their size, geographic location, and
the risk they are willing to face. Some of these limits of other are explained
in a bank’s written loan policies. The Board of Directors of the bank, which
has the ultimate responsibility for all loans that are made, acts as a
guideline for those involved in the lending process.
Unit 5:
OVERDRAFT
An overdraft occurs when a check is written on
uncollected funds. In other words, an overdraft is a facility which allows an
individual to with draw funds from his checking account in excess of the credit
balance. If a bank pays on a check written against uncollected balances, it is
an unsecured loan. Some overdraft loans
are written with prior permission of the bank, but most are not. In the latter case, overdraft loan can
be for less than one day (daylight
overdraft), such as when a check is written in the morning and the deposit
to cover that check is not made until that afternoon, or for one or more days.
The customer is charged interest only on the amount he uses and the rate of
interest is calculated daily on the prime rate. Normally no regular repayment
is set. The customer can repay any amount at any time simply by paying money.
Unit 6:
DOCUMENTARY COLLECTION
Collection is
method of international payment. The term collection refers to the process of
presenting an item, such as a check, to the maker for payment.
Collections are
divided into two categories: clean and
documentary. Clean collections means that there are no shipping documents attached. Traveler’s
checks and money order are examples of clean collections.
Documentary
collections means that there are documents included in the collection order
which is sent to the exporter’s bank for collection of the payment from the
importer. The exporter tells his bank to present the draft and documents to the
importer for collection. The exporter bank uses a bank in the importer’s
country to accomplish this. This correspondent bank will work with the
importer’s bank, and collect the funds and present the bill of lading and other documents to the importer. The bank
receives a fee for acting as the exporter’s agent in the collection process.
Banks that are actively
engaged in such collections may have form letters that give explicit instructions as to how the
payments are to be made, the documents that are involved, and other pertinent information.
The basic difference between the collection method and a letter of
credit is that an irrevocable letter of credit is an obligation of the issuing
bank, whereas an exporter’s draft is drawn on the importer. The collection is
less costly than a letter of credit and is frequently used when the risks to
the exporter are relatively small.
Unit 7: TYPES AND USES OF WORKING CAPITAL
Profitability is determined in part by the way in which a company manages its working capital. Basically there will be a drop in profits if working capital is
raised without a corresponding rise
in production. So one of the principal functions of financial management is to
provide the correct amount of working capital at the right time and in the
right place to realize the greatest
return on investment.
Working capital
can initially be broken down into two types: permanent and temporary. Permanent working capital is tied up in
keeping the business flowing throughout the year, while temporary working capital is needed from time to time to take account of seasonal, cyclical or unexpected
fluctuations in the business. The latter type is usually serviced from an
overdraft facility.
Both types of
working capital have three major
applications: firstly inventories, secondly debtors and finally cash. Inventories
can be further divided into inventories of raw materials, work in progress and
finished goods. There three can soak up
an enormous amount of excess working
capital if not well managed. It is the job of the financial manager to minimize
the stocks of raw materials, the level of work in progress and the quantity of
finished goods. However, over-stringent
control can lead to disruption in
production caused by the delay in receiving raw materials, a failure to take account of costly price rises in the pipeline, a failure to keep the production volume required by
future sales, and resulting expensive and damaging effects on customer
goodwill. As one can see from the foregoing
diagram, this can become a vicious
circle where the loss of goodwill finally leads to loss of sales and
results once again in stringent cost
controls
The just-in-time philosophy, developed in Japan
On the debtor
side, working capital is required to finance the gap between payment due to
suppliers and payment owed by customers. It is the task of financial management to see that generous credit terms are negotiated
with suppliers but minimal credit is offered to customers. Again
a balance must be achieved between getting and giving good credit terms
in order to attract customers and
maintain
relationship with suppliers on
one hand, and minimizing cash outlay
on the other hand.
Finally, cash is
needed for both normal and abnormal requirements.
Sound cash management will ensure that adequate cash is available for meeting
the company’s day-to-day debts and there is also a small reserve on hand to meet contingencies.
Unit 8:
FINANCIAL ANALYSIS
There are four
critical areas of a company’s business which can be analyzed by applying ratio.
These are liquidity, capital structure,
activity and efficiency, and profitability.
Measurements of
liquidity should answer the question: Can a company pay its short-term debts? There are two
ratios commonly used to answer this question.
Firstly, the current ratio,
which measures the current assets
against the current
abilities. In most most cases, a healthy company would show a ratio above
“1”, in other words more
current assets than current liabilities. Another method of measuring
liquidity is so-called quick
ratio – this is particularly
appropriate in manufacturing industries where stock levels can disguise the company’s true liquidity.
The ratio is
calculated in the same way as above but the stocks are deducted
from the current
assets.
The balance sheet
will also reveal the gearing of the
company – this is an
indicator of the company’s capital structure and its ability to
meet its long-term debts.
The ratio expresses the relationship between shareholder’s funds and loan
capital.
Income gearing is also important and show the ratio between profit and interest paid
on borrowings. Highly geared companies
generally represent a greater risk for
investors.
The balance sheet
and the profit and loss account can
be used to assess how
efficiently a company manages its assets. Basically, sales are
compared with
investment in various assets. For examples, in the retail sector,
an important ratio
which indicates efficiency measurements is to calculate the average collection
period on debts. This is found by dividing debtors’ by the sales per day. This
can vary tremendously from industry
to industry. In the retail sector it may well be as low as one or two days,
whereas in the heavy manufacturing and
service sectors it can range from
thirty to ninety days.
Finally, profitability ratios show the manager’s
use of the company’s
resources. The profit
margin figure (profit before tax divided by sales and expressed
as a percentage) idicates the operational day-to-day profitability of the business.
as a percentage) indicates the operational day-to-day profitability of the
business. Return
Return on capital employed can
be calculated in a number of ways. One common
method is to take profit before taxes and divide by the total
assets – this is a good
indicator of the use of all assets of the company. From the shareholder’s point of
view, the return on owner’s
equity will be an important ratio; this is calculated by
dividing the profit before taxes by the owner’s equity and the
expressing it as a
percentage – If the company
does not earn a reasonable return, the share price willlll
fall and thus makes it
difficult to attract additional capital.
New words:
1.
Equity gearings (n): Tỷ lệ vay theo
Vốn chủ sở hữu
2.
Liquidity (n) = tính thanh khoản
3.
Capital structure (n): Cấu trúc vốn,
cơ cấu vốn
4.
The average collection period on
debts (n): Kỳ thu nợ bình quân
5.
Dividends (n) Cổ tức
6.
Tremendously (adv): mạnh mẽ, hết sức
7.
ROA = Rate on Assets (n): Tỷ lệ Lợi
nhuận trên Tổng tài sản
ð Phản ánh hiệu quả sử dụng Tài sản của công ty, cho biết để tạo ra
1 đồng
Lợi nhuận thì công ty đã sử dụng bao
nhiêu đơn vị tài sản
8.
ROE = Rate on Equity (n): Tỷ lệ Lợi
nhuận trên Vốn chủ sở hữu
ð Phản ánh hiệu quả sử dụng Vốn chủ sở hữu của công ty, cho biết để
tạo ra
1 đồng Lợi nhuận thì công ty đã tiêu
tốn bao nhiêu đồng Vốn chủ sở hữu.
Công thức:
|
The average collection period on debts =
|
Debtors (Tổng nợ = Nợ ngắn hạn + Nợ dài
hạn)
|
|
Sales per day
|
|
Equity gearings =
|
Loan capital (Vốn vay)
|
|
Share holder’s funds (Vốn góp cổ đông)
|
|
Income gearings =
|
Profit
|
|
Interest paid on borrowing (Chi phí trả
lãi)
|
|
Inventory turnover =
(Vòng quay hàng tồn kho)
|
Sales (Tổng doanh thu bán hàng thuần)
|
|
Stock (Tổng giá trị hàng tồn kho)
|
|
Current ratio =
|
Current Assets
|
|
Current Liabilities
|
|
Quick ratio =
|
Current Assets - Stocks
|
|
Current Liabilities
|
|
Profit Margin =
|
Profit before Tax (Lợi nhuận trước thuế)
|
|
Total assets
|
|
ROA =
|
Profit before
tax (Lợi nhuận trước thuế)
|
|
Total assets
|
|
ROE =
|
Profit before
tax (Lợi nhuận trước thuế)
|
|
(Owner’s)
Equity
|
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