This acts as a source of finance in such as the company holding; such debtors can discount them with a bank and obtain immediate finance. They can be used as security for loans in particular overdrafts. The company can continue to sell on credit and as such this source can be a semi –permanent source of finance.
Examples of these are;
- accrued electricity bills
- accrued telephone bills
- accrued water bills
- accrued rent
- Accrued rates.
These are a short-term source of finance and can be big sources if the company has a number of these outstanding expenses. However, a company should use these in as much as they cannot affect its future operations and only pay such on the last date
when these are due.
Credit Card buying (plastic money)
These are arrangements whereby a company or an individual enters into an agreement with a credit card organization to use their card to purchase a number of goods and services and pay after agreed period of time. Usually repayment carries interest charges. These cards are used to obtain such goods and services as:
- fuel expenses in particular for tour companies
- Medical expenses for employees and their families.
- Vehicle maintenance
- Air transport
- Purchase of inputs such as oils, spare parts e.t.c.
Reasons why Plastic Money has Developed Fast in Kenya of late
1. Due to high incidences of frauds by dishonest employees these cards e.g in tour companies.
2. They minimize the use of liquid cash thus reduces chances of petty cash frauds and also solves the company’s liquidity problems and those of individuals.
3. Kenyan society has developed fast (in sophistication) and the use of these cards is a sign of high social and economic status.
4. There is a lot of awareness amongst Kenya’s elite community as regards credit facilities and as such have responded to the introduction of this type of money fast.
5. There is a lot of risk associated with carrying lots of cash which is open to theft and as such people prefer to carry finance in card form.
6. A number of companies and establishments have quickly recognized these cards as a means of settling bills and some even give discounting to card holders which has boosted their popularity.
7. It is a source of finance to individuals who depend on monthly earnings who settle their bills using the credit cards and later pay at the end of the month when their liquidity position warrants it.
Disadvantages/ limitations of using credit cards as a source of finance.
1. It is expensive to obtain (because the bolder has to deposit some amount of money with credit card
2. Organizations) and later pay interest on all his expenditure.
3. It may lead to unwarranted spending which may lead to financial strain on the part of the holder when it comes to settling his bills.
4. The majority of Kenyans are unaware of these credit card facilities in particular the rural Kenyans who form the majority of Kenyans.
5. The card is limited only to those establishments which have formal arrangements with credit cards