Dealing in corporate bonds isn’t always smooth sailing, but corporations can provide investors with a life jacket in the form of a sinking fund.
A sinking fund is a fund businesses and individuals use to gradually set aside money to pay off a debt or bond. In corporate finance, companies use sinking funds to pay off corporate bonds.
A sinking fund provides added security for investors in a corporate bond issue. It significantly reduces the risk of default by setting aside funds to repay the bonds at maturity. In essence, the amount the company needs to pay at maturity is much smaller when a sinking fund is in place.
Companies use budgeting and forecasting software to estimate future revenue across operations, create budgets for departments, and understand where they should put their money.
Sinking fund protection is a feature in some bonds that limits or modifies the issuer's ability to redeem bonds through a sinking fund mechanism. It benefits bondholders by restricting early redemption and protecting against unfavorable interest rates.
There are four kinds of sinking funds, each with a unique use case.
The name of this one gives it away – a specific purpose sinking fund is established for a specific purpose. For example, a company may want to open a new physical office headquarters in Chicago. It can create a specific purpose sinking fund to finance the construction and furnishing of the new location.
A regular payment sinking fund facilitates regular and systemic payments over time to a specific entity or multiple entities. Corporations can count on this money to pay trustees or meet interest payments on corporate bonds.
Companies establish purchase-back sinking funds when they want to buy back a bond. This comes in handy when purchasing it back at an advantageous market price.
Callable bonds are issued with an option that lets the issuer “call” them back, i.e., buy back the bonds. A callable sinking fund is explicitly for callable bonds.
Along with making certain a business sets aside enough money to meet its financial obligations, sinking bonds bring additional benefits to the companies that use them.
It’s no secret that investors request a thorough review of a business's financial status before committing. Favorable financial projections and a rock-solid financial plan help investors determine whether they’ll make their money back.
Imagine being an investor and spotting two businesses with similar structures and financial plans. Both companies are searching for a corporate bond, but one has a sinking fund, and the other doesn’t. Which one looks more promising to you, dear investor?
Hopefully, you’d choose to invest in the business with the sinking fund as it offers protection and commitment to paying off the debt compared to the company without a plan.
Sinking funds provide a safety net for corporate bond issuers. With funds set aside to pay off the bonds at maturity, the risk of defaulting on the money owed drops considerably.
If we revisit the example above, the one without the sinking fund has a higher default risk. They’ll have to make a large lump sum payment at maturity. Where will they get this money from? Are they hoping their business grows? How do they pay if it doesn’t?? Sinking funds eliminate the need for these kinds of questions.
Sinking funds can lead to better interest rates on bonds since they provide a level of security that lowers the risk of defaulting. This combination of factors generally results in positive credit ratings and makes the business appear more creditworthy than those without a sinking fund. Positive credit ratings offer value if the company realizes it needs to issue additional corporate bonds to support its financial situation.
Companies need to plan effectively for future business activities and operations, and Budgeting and forecasting software enable businesses to build a plan that supports their future business operations. Budgeting and forecasting software solutions facilitate revenue and expense estimation, budget creation, and profitability oversight.
To qualify for inclusion in the budgeting and forecasting category, a product must:
* Below are the top five leading budgeting and forecasting software platforms from G2’s Spring 2024 Grid® Report. Some reviews may be edited for clarity.
Ramp is a financial solution for businesses of all sizes that saves time and money through price intelligence and advanced automation. Businesses turn to Ramp to understand whether they’re overspending, accelerate monthly close with automated tasks and workflows, and make payments easy.
“Ramp has been extremely easy to migrate to from our previous system. Cardholders love how easy it is to submit expenses and that it provides multiple integrations so they don't have to upload every receipt. The artificial intelligence (AI) built into Ramp is top-notch. It has reduced the time I spend managing corporate cards each month and the amount of time cardholders and approvers spend on corporate cards. Ramp is great for finance teams where you're juggling multiple hats. Ramp physical and virtual cards can be added to Google/Apple Pay, and that's helpful. Ramp just makes life easier.”
- Ramp Review, Josh W.
“I wish there was a low-limit way to onboard smaller clients, like small businesses and nonprofits with cash flow swings. I do a lot of work in these industries and would love to set them off on the right foot, but they don't always have the cash minimum. It would be nice if an "entry" option gave a low spend limit in this scenario so bookkeepers could design a system for them from day one using this tool. Instead I have to set them up on a totally different software and hope to switch eventually. That makes my workflow slower because I have to work in a subpar system.”
- Ramp Review, Tarrah B.
Anaplan’s enterprise cloud software aligns businesses with their objectives and resources to drive better outcomes. Anaplan’s proprietary Hyperblock™ technology produces ultra-fast calculations, even for large datasets. This means businesses make quicker decisions as they navigate evolving marketing conditions and challenges. Organizations that use Anaplan can bring more key stakeholders into the decision-making process for better collaboration.
“Anaplan is a type of system which, if implemented successfully, sells itself inside the company. The more functions you get on the platform, the larger the benefit of having such a platform can be. It is very simple to integrate and synchronize different areas of Anaplan models between each other, like making your supply chain application deliver data automatically to your finance application by doing away with long email chains of finding the correct version of the plan to use.
It also extends to third-party sources. Anaplan supports easy integration possibilities with dedicated analytics tools or allows for simple integration with source systems. It's fast and reliable and does not need a lot of IT resources to set up.”
- Anaplan Review, Andris I.
“Dashboard functionality is not as flexible as Excel. For example, the font size is not adjustable. Cell highlighting by the user is not possible. The line item alias is not there; we must create a separate line item to accommodate the reporting requirement.”
- Anaplan Review, Ivan L.
Workiva unites financial reporting, environmental, social, and governance (ESG), and governance, risk, and compliance (GRC) in one platform for centralized business operations. Accounting and finance teams use it to automate tedious financial tasks and manual reviews, connect data sets from enterprise resource planning (ERP) tools, and collaborate with key stakeholders.
“Workiva continues to deliver results at scale for programs and projects involving many users dealing with sensitive data. Its capabilities do not seem to be possible in other software platforms.
Additionally, I am impressed by how Workiva continues to improve every year. There always seems to be something to look forward to with new tools such as Process, Workiva Generative AI, and more.”
- Workiva Review, Bruno R.
“One drawback I've encountered with data prep in Workiva is the limited availability of comprehensive learning resources. Finding detailed guides or tutorials can be challenging. This lack of extensive learning materials might make it more time-consuming for users to grasp advanced features or optimize their data preparation workflows effectively.”
- Workiva Review, Mounir C.
Mosaic Tech is a strategic finance platform with real-time analytics data and planning capabilities that empower businesses to make decisions faster. Mosaic Tech automates data integrations, consolidated financial and operational data, refine financial processes to save time, and provides interactive modeling for cross-functional team alignment. Mosaic Tech aims to help businesses plan for the future through a strategic financial lens.
“The team at Mosaic Tech has built a truly practical SaaS software solution that allows us to integrate all our data sources needed to forecast the entirety of our SaaS business in one platform. Our ADP, Sage Intacct, and Salesforce instances were all successfully connected in about a week. Setting up our financial statements followed intuitive formatting and tying out processes. Our assigned integration team was very responsive in helping us establish our initial forecast model, which allowed us to leave our old spreadsheet models in the past.”
- Mosaic Tech Review, Benjamin A.
“Report formatting is somewhat rigid. I can’t export reports as PDFs and would also like to auto-schedule reports for email recipients. Additionally, models don't export to Excel intact, making it difficult to share with investors.”
- Mosaic Tech Review, Craig H.
SAP Business Planning and Consolidation (SAP BPC) provides forecasting, budgeting, financial planning, and consolidation functionality. It enables organizations to adjust forecasts easily and speed up closing cycles while ensuring compliance. Teams can use what-if modeling scenarios to plan and assess budgets in real-time, automate manual processes leading to shorter closing cycles, and meet audit requirements.
“SAP Business Planning and Consolidation is ideally suited for company planning and budgeting. It also aids in the best possible consolidation of group entities and reporting. SAP BPC is a highly effective tool for consolidating a group executing numerous projects simultaneously, and it may be extremely beneficial in financial reporting.”
- SAP BPC Review, Daniel W.
“The biggest disadvantage is the user interface, which detracts from the overall attractiveness of usability. For SAP BPC to be extensively adopted in our business, the interface has to be enhanced. Before data can be used, it must be updated several times. It should be made less reliant on IT, coding should be reduced, and more standard features and packages that can handle the most frequent cases should be available. The data loading procedure may also be reduced, master data and hierarchies can be optimized, and script documentation is relatively restricted.”
- SAP BPC Review, Tammy K.
Sinking funds provide security to increase the safety of investing in a bond. However, no matter the precautions you’ve taken, there’s always a chance of a storm that can steer you off course. You can breathe a little easier knowing that your sinking fund is there to float you through any kind of weather.
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