Cash Budget And Source Of Finance For A Business

Question 1

Record-Keeping

Answer 1

Every business needs to know where it stands financially (what money it has)

To keep a track of the money in a organisation, they should keep suitable records on its finances

An organisations records allows it to manage it’s cash, debtors (people who owe the business money) and it’s stock (items it sells to make a profit)

Question 2

Cash Budget

Answer 2

A cash budget (also called a cash flow forecast) shows all the planned cash coming into a business as well as the planned cash being spent in a business.

It is done on a month-by-month basis.

A cash budget looks ahead to the future and helps to identify months where cash may be short in the business - this will help to business plan for such events and hopefully be able to do something to avoid overspending their cash.

Question 3

Cash In: Planned Receipts (Cash Incoming)

Answer 3

Cash sales

Cash received from debtors (people who owe us money)

Money invested by owners

Selling off fixed assets (e.g buildings)

Loans

Grants

Question 4

Cash out: Planned Payments (cash outgoing)

Answer 4

Cash Purchases

Cash paid to creditors (people who we owe money)

Money taken out by the business by the owners (drawings)

Purchasing fixed assests (e.g buildings)

Repaying loan and interest

Paying expenses (e.g rent) and tax

Question 5

Steps in Preparing a Cash Budget

Answer 5

Step 1: Prepare a skeleton template and insert opening cash
Step 2: Record all receipts (cash in) and total receipts
Step 3: Record all payments (cash out) and total payments
Step 4: Calculate net cash position (Total Receipts - Total Payments)
Step 5: Calculate planned opening cash (closing cash from previous month is always the opening cash for the next month i.e closing cash in January is the opening cash for February)
Step 6: Calculate planned closing cash (Net Cash + Opening Cash = Closing Cash)

Question 6

Sources (Types) of Finance for a Business

Answer 6

A business may need to obtain money from places outside of the organisation to meet their financial needs at various stages.

Sources (types) of finance can be short-term, medium-term or long-term depending on the need of the business

It is important that when deciding on a source of finance, a business uses the matching principle- this means matching the source of finance with the use of finance

For example: a Business would not use a short-term source of finance to buy a large item like a building (a long term use)

Question 7

Trade Creditors

Answer 7

Buying goods from suppliers and paying for them at a later date (usually 30 days later)

Any Costs / Risks?
No but you may not get a trade discount for paying early

Question 8

Credit cards

Answer 8

Can be used to purchase items immediately and you pay for them later ( usually 30 days later)

Any Costs / Risks?
No if you pay your bill on time; if not you may pay a high rate of interest

Question 9

Bank overdraft

Answer 9

An agreement with the bank that you can take out more money than is in your account - up to a certain limit

Any Costs / Risks?
Interest is changed on the extra anount taken out by the business

Question 10

Short term source of finance

Answer 10

Trade creditors
Credit cards
Bank overdraft

Question 11

Medium-Term Sources of Finance

Answer 11

Medium-Term loan
Leasing
Hire purchase

Question 12

Medium-Term loan

Answer 12

This is money borrowed from a financial institution that must be paid back, with interest within 5 years.

Any Costs / Risks?
Yes the values of the loan plus interest must be repaid.

Question 13

Leasing

Answer 13

This is where a business rents an asset from a leasing company e.g machinery.

Any Costs / Risks?
The cost of the lease. The business will never own the asset.

Question 14

Hire purchase

Answer 14

A business buys an asset and pays for it in instalments (a certain amount of money each month). They can use the asset straight away.

Any Costs / Risks?
Hire purchase is more expensive than loans and leasing but the asset will be owned when the final instalment is paid.

Question 15

Long-Term sources of Finance

Answer 15

Grant
Capital
Long-Term loan

Question 16

Grant

Answer 16

This is money given by the government to a business for a particular purpose.

Any Costs / Risk?
The grant does not have the be paid back provided it is used for the reason it was given.

Question 17

Capital

Answer 17

This is the money that the owners and investors put into the business

Any Costs / Risks?
Dividends (a percentage of the overall profit) are paid to investors at the end of the year.

Question 18

Long-Term loan

Answer 18

This is money borrowed from a financial institution that is paid back over more than 5 years.

Any Costs / Risks?
Yes the values of the loan plus interest must be repaid.

Question 19

Factors to consider when choosing a source of finance

Answer 19

Purpose: why is the business taking out the loan? Is it for a short-term, medium-term or long-term item?

Amount: what can the business afford to pay back?

Cost: are there any extra costs (like interest) involved with the chosen source of finance?

Security: are the lenders looking for collateral (an asset that is promised to the lender if the source of finance is not paid back by the agreed date)?