Introduction to Corporate Finance

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payable department, where payment is authorised and cheques or other forms of payment are initiated.

Centralised systems offer many advantages, including easier concentration of funds, improved access to

cash position information, better control and reduced transaction and administrative costs. There are,

however, several problems with centralised payables, such as slow payment times (which could damage

relationships with vendors or cause missed opportunities for cash discounts) and the need to coordinate

between central payables and field offices or managers to resolve any disputes.

Some companies utilise a more decentralised system to the payables and disbursement process in

which payments are authorised and, in some cases, initiated at the local level. Although this approach

generally helps to improve relationships with vendors and enhance local management autonomy, it makes

it harder to concentrate funds and obtain daily cash position information, and it increases the chance of

unauthorised disbursements.

finance in practice

FINDING CREDIT CARD FINANCE CHARGES AND MINIMUM PAYMENTS

Very few bank credit card users understand how

the card issuer determines the finance charge

and minimum payment. Assume that you have a

SuperBank Visa card that charges a monthly interest

rate of 1.5% on the average daily balance (the most

popular method) and requires a minimum payment

equal to 5% of the new balance, rounded to the

nearest dollar. Assume your statement extends

from 10 October to 10 November – a total of 31

days – and your balance on 10 October was $582.

During the period, you made the following three

transactions:

October 15 Purchase $350

October 22 Purchase 54

November 22 Payment 25

As a result, you have the following account

balances:

■ Average daily balance = $28,068 ÷ 31

= $905.42

■ Finance charge = $905.42 × 0.015 = $13.58

■ New balance = $961 + $13.58 = $974.58

■ Minimum payment = 0.05 × $974.58 = $48.73,

which rounds to $49.00

The calculations above show that your finance

charge was $13.58 (1.5% of your average daily

balance of $905.42). Adding it to the end-of-month

account balance of $961, your new balance was

$974.58. The minimum payment of $49 equalled

5% of the new balance – $48.73 – rounded

to the nearest dollar. Note that if you pay the

$49 minimum payment, $13.58 of it will cover

the finance charge and the remaining $35.42

($49.00 – $13.58) will be applied to the balance

outstanding when the payment is received.

Dates Number of days (1) Balance (2) (1) × (2) (3)

11–15 Oct. 5 $582 $ 2,910

16–22 Oct. 7 $582 + $350 = 932 6,524

23 Oct.–6 Nov. 15 932 + 54 = 986 14,790

7–10 Nov. 4 986 – 25 = 961 3,844

Total 31 $28,068