Chapter 13- Fiance

Question 1

What is a cash flow forecast

Answer 1

A Cash Flow Forecast is a written plan in which a business sets out its expected future cash receipts and payments over a period. This helps to estimate whether they will have a future cash surplus or a cash deficit.

Question 2

How can a business deal with an expected future deficit

Answer 2

Increase Cash Receipts

1) Use credit control methods, e.g. offer discounts for prompt payments.
2) Sell some of its investments.
3) Have a sale and increase cash flow.

•Reduce Cash Payments

4) Spread payments for expensive items, e.g. leasing of vehicles rather than buying.
5) Reduce expenses, e.g. wage cutbacks.
6) Reduce dividend payments, e.g. offer free shares.

Question 3

Why does a business prepare a cash flow forecast

Answer 3

To avoid Cash Deficits – the business will know in advance when it is likely to have a cash shortfall (deficit), and it can take steps to increase receipts, or reduce payments, e.g. arrange a bank overdraft.

• To Improve Financial Control – it can compare actual receipts and payments with those forecasted, and know if it is on target or not.
• To Raise Finance – can be used to convince investors that the business is properly managed.
• To Increase Profits – the business can make extra returns (e.g. interest) by investing surplus cash identified by the cash flow forecast. It can also reduce costly overspending.

Question 4

What is a budget

Answer 4

A Budget is a written plan in which a household sets out its expected future receipts and payments over a period.
This helps to identify a future cash surplus or a cash deficit, and the household can plan accordingly.

Question 5

How can a household deal with an expected cash deficit

Answer 5

Increase Cash Receipts

1) Earn additional income, e.g. overtime, part-time job.
2) Rent out a room in the house.

•Reduce Cash Payments

3) Spread payments for expensive items, e.g. buy a TV on hire purchase rather than spending a lump sum.
4) Make cutbacks, e.g. non-brand items.

Question 6

Why does a household prepare a budget

Answer 6

To avoid Cash Deficits – the household will know in advance when it is likely to have a cash shortfall (deficit), and it can take steps to increase income, or reduce expenditure, e.g. arrange a bank overdraft.

• To Manage its Money Better – it highlights particular areas of overspending that can be cut back on.
• To Raise Finance –used to convince a bank manager that the family are a good risk for a loan.
• To Help Maximise Investments – the household can invest surplus cash identified by the budget and earn extra interest.

Question 7

Why is a spreadsheet

Answer 7

A spreadsheet is computer software that is used for basic accounting and can do maths calculations when the user types in a formula.

Question 8

What is an advantage of a spreadsheet

Answer 8

It performs basic mathematical calculations accurately and quickly
•Allows for “what if” analysis, i.e. what will the answers be if the numbers change?

Question 9

What is short term finance and list five examples

Answer 9

Short-term sources are borrowings that must be repaid with 1 year. It should be used to acquire items that cost less and will be used up in less than a year.

Bank Overdraft

Accrued Expenses

Credit Card

Factoring

Trade Credit

Question 10

What is a bank overdraft

Answer 10

This is where the bank allows the household/business to pay for things, up to the value of an agreed amount (limit), even though they don’t have enough money in their current account to cover this.
The money is paid back, with interest, as soon as funds are lodged into the current account.
How

Question 11

Three advantages and disadvantages of a bank overdraft

Answer 11

Interest is only paid on overdrawn amount
No security/collateral is needed
Business only: the interest is tax deductible

Rate of interest on an overdraft is expensive
The account has to be overdraft free for at least 30 days per year
Bank can ask the customer to pay back the overdraft immediately

Question 12

What are accrued expenses and list two advantages and two disadvantages

Answer 12

The household/business gets services now, e.g. electricity, phone, and when the bill comes in pays for them at the agreed date.

Advantages
No interest is charged
No security (collateral) is needed

Disadvantages
Only suitable for certain purchases e.g. utility services
If it takes too long to pay the bill, it will be cut off

Question 13

What is a credit card and list two advantages and two disadvantages

Answer 13

A customer can pay for goods or services with this card and is given up to seven weeks to pay before interest is charged, e.g. VISA, Mastercard

Advantages
No interest is charged if bill is paid on time and in full
Safer then carrying cash around as the card can be cancelled

Disadvantages
If the bill is not paid on time, very high interest is charged
Must pay a government tax for every credit card it has

Question 14

What is factoring and list two types

Answer 14

The business raises money by selling its debtors to a bank for cash. Rather than waiting for the debtors to pay at a later date the business gets money now (about 80%)

Two types of factoring:

1. Factoring with resource – the business pays back the bank if any debtor doesn’t pay up.
2. Factoring without resource – the business doesn’t pays back the bank if any debtor doesn’t pay up.

Question 15

What is trade credit and list two advantages and disadvantages

Answer 15

The business buys stock now and pays at a later agreed date – ‘buy now, pay later’.

Free source of finance, if the bill is paid on time
If interest is paid, it is tax deductible

A business over-using trade credit is said to be ‘Leaning on the trade’ and will result in the business losing its credit rating
If bills are paid late, it won’t get cash discounts

Question 16

What is medium term finance and list the four types

Answer 16

Medium-term sources are borrowings that must be repaid within 1-5 years. Used for more expensive items that will take 5 years to repay or to use, e.g. vehicle.

Hire purchase
Leasing
Personal loan

Question 17

What is hire purchase

Answer 17

This involves buying an asset and taking delivery of it now but paying for it in instalments.
The household/business will become the legal owner when the last instalment is made.
If the household/business has paid one third (⅓) or more the HP company can repossess the item but only with a court order.
A household/business can end a HP agreement provided that it has paid the hire purchase company one-half (½) of the HP price.

Question 18

What is leasing and list two advantages and two disadvantages

Answer 18

The household/business rents an asset from a finance company and pays a monthly lease. It never owns the asset.

No security needed
Business only: ownership of the business is not affected

Non-payment will result in repossession of the asset
Leasing for a long time may cost more than the asset

Question 19

What is the difference between a personal loan and a medium term loan

Answer 19

Personal Loan: [Household only]
The household borrows money from a bank or credit union, which is repaid with interest over a period of 1-5 years. The interest rate may be ‘fixed’ or ‘variable’.

Medium Term Loan: [Business only]
The household borrows money from a bank which is repaid with interest over a period of 1-5 years. The interest rate may be ‘fixed’ or ‘variable’.

Question 20

What are the 6 examples of long term finance

Answer 20

Mortgage

Savings

Retained Earnings

Grants

Debentures

Equity Capital

Question 21

Is the a mortgage and savings

Answer 21

A mortgage is a long-term (usually 20-30 years) loan used to buy or renovate a house. The loan is secured on the house. The household will make monthly repayments. The interest rate may be ‘fixed’ or ‘variable’

Savings: [Household only]
This is money that the household does not spend and is set aside for future use. It allows them to purchase assets without the need for borrowing.

Question 22

What are retained earring and list two advantages and two disadvantages

Answer 22

Retained Earnings (Reserves) are the profits that the business has saved up to reinvest in the firm. It is the savings for a business.

No borrowing involved, so no interest paid.
No security needed.

It takes a long time to build up sufficient reserves – not an option for new businesses.
Shareholders will be unhappy if low dividends were paid

Question 23

What are debentures and equity capital

Answer 23

A Debenture is a long-term loan to a company, secured on the company’s assets. The business pays a fixed rate of interest every year and repays the initial sum borrowed, as a lump sum, at a future date.

Equity Capital: [Business only]
This is where the business sells shares to investors to raise capital. These shareholders will receive a dividend, and voting rights, in return for their investment. The dividend will depend on the profitability of the company that financial year.

Question 24

What should be considered when choosing a source of finance

Answer 24

Cost – look for the cheapest source of finance. They should look at the APR’s offered by the different financial institutions.

2.Purpose of the Loan – the business/household should match the source of finance to the item they are buying. For example, a short term source of finance for items used up within one year, e.g. holiday, buying stock.

Security – households/businesses need to take into account whether they need to provide assets as security for the loan, e.g. house. These assets can be possessed if there is non-payment.

2. Tax Implications – will they get a tax deduction for the interest paid on the finance? If so, this would reduce the cost of the repayments.
3. Control (for Businesses only) – does the source of finance involve the owner giving away some their ownership (e.g. shares) of the business? Equity capital means that the business gives away some control to shareholders.