Cashflow And Source Finance - Chapter 19

Question 1

What should an organisation do to keep track of money?

Answer 1

they should keep suitable records on its finances

Question 2

What is a cash flow forecast?

Answer 2

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.

Question 3

What is cash-in?

Answer 3

● Cash Sale
● Cash received from debtors
● Money invested by owners
● Selling off fixed assets (e.g buildings)
● Loans
● Grants

Question 4

What is cash-out?

Answer 4

● Cash Purchases
● Cash paid to creditors
● Money taken out of the business by the owners (drawings)
● Purchasing fixed assets (e.g buildings)
● Repaying loan and interest
● Paying expenses (e.g rent) and tax

Question 5

Learn how to prepare a cash budget (cash flow forecast)

Question 6

What can sources of finance be?

Answer 6

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

Question 7

What are trade creditors? And is there any costs/risks?

Answer 7

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

Costs/Risks:
No, but you may not get a trade discount for paying early.

Question 8

What are credit cards? And is there any costs/risks?

Answer 8

Explanation:
Credit cards can be used to purchase items immediately and you pay for them later (usually 30 days later).
Costs/Risks:
No, if you pay your bill on time. if not you may pay a high rate of interest.

Question 9

What are bank overdrafts? And is there any costs/risks?

Answer 9

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

Costs/Risks:
Yes, as interest is charged on the extra amount taken out by the business.

Question 10

What are medium-term loans? And is there any costs/risks?

Answer 10

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

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

Question 11

What is leasing? And is there any costs/risks?

Answer 11

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

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

Question 12

What is hire purchase? And is there any costs/risks?

Answer 12

Explanation:
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.

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

Question 13

What is a grant? And is there any costs/risks?

Answer 13

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

Costs/Risks:
The grant does not have to be paid back provided it is used for the reason it was given

Question 14

What is capital? And is there any costs/risks?

Answer 14

Explanation:
This is the money that the owners and investors put into the business.

Costs/Risks:
Dividends are paid to investors at the end of the year

Question 15

What is a long-term loan? And is there any costs/risks?

Answer 15

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

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

Question 16

What falls under the short-term source of finance category?

Answer 16

These sources of finance fall under the short-term source of finance (0-1 years)
● Trade creditors,
● Credit cards
● Bank overdraft

Question 17

What falls under the medium-term source of finance category?

Answer 17

These sources of finance fall under the medium-term source of finance (1-5 years)
● Medium-term loan
● Leasing
● Hire purchase

Question 18

What falls under the long-term source of finance category?

Answer 18

These sources of finance fall under the long-term source of finance (over 5 years)
● Grant
● Capital
● Long-term loan

Question 19

Give 4 factors to consider when choosing a source of finance.

Answer 19

1. Purpose: why is the business taking out the loan? Is it for a short-term, medium-term or long-term item?
2. Amount: what can the business afford to pay back?
3. Cost: are there any extra costs involved with the chosen source of finance?
4. Security: are the lenders looking for collateral