Chapter 13: Finance Flashcards
Why is it important for a business and household to budget? Examples of budgeting for each.
Business-no cash to pay bills, will be taken to court and could face liquidation. E.g. CFF
Household-No money to pay mortgage could lose their house. E.g. Household Budget
What is a cash flow forecast? Give one example of a receipt and one example of a payment.
Written plan in which a business sets out expected receipts and payments over a period of time. E.g. Receipts: Cash received from selling goods or from debtors. Payments: Buy Stock, paying creditors
How can a business increase cash receipts or reduce payments to deal with a deficit?
Increase Cash Receipts:
1. Offer a discount so people pay quickly.
2. Sell some of your investments to raise cash.
3. Have a sale to encourage customers to spend.
Reduce Payments:
1. Spread out payments and avoid paying lump sums.
2. Make cutbacks. E.g. Cut wages.
3. Reduce Dividends
What are the advantages of a CFF?
- Avoid Cash Deficits: Business has time to prepare for future deficits by reducing payments or increasing receipts.
- Financial Control: Improved financial control, the business can monitor whether its on or off target to achieve closing cash figures.
- Raise Finance: A business would be expected to provide a CFF when applying for a loan or approaching potential investors.
- Increase Profits: Any cash surpluses can be spotted in advance and those surpluses should be invested to generate more money.
What is a household budget? Give examples of income and expenditure.
A document used by households to keep track of their finances. Sets out expected income and expenditure. E.g. Income-Wages, Social Welfare. Expenditure-Rent, Motor Tax
How can a household increase receipts or decrease payments to deal with a deficit?
Increase Receipts:
1. Do Overtime or 2nd person could get a job. Any form of extra wages
2. Rent a room out, take in foreign students
Reduce Payments:
1. Avoid big chunks of cash payments and instead buy using a loan to spread out the payments
2. Make cutbacks, decrease usage of utilities, change supplier.
What are the advantages of a budget?
- To Avoid Cash Deficits: The house has time to prepare for future deficits by reducing payments or increasing income.
- Manage money: Improved financial management highlights areas where cutbacks can be made.
- Raise Finance: A house can provide a budget when applying for a loan to try convince the bank to lend to them.
- Maximise investments: Any cash surpluses can be spotted in advance and those surpluses should be invested to generate more money.
What is a spreadsheet?
A spreadsheet is computer software used to do basic maths calculations. It can prepare a budget or Cash flow forecast quicker and more accurately. It allows the user to calculate hypothetical financial situations instantly.
What factors are considered by bank when applying for a loan?
- Character: Is the business / house honest, reputable? How long has the business existed? How long as an individual had a job?
- Capacity: Proof of ability to repay loan + interest. P60 for house, P&L for business.
- Collateral: Any valuable assets to offer as security. The family house/the business’ fixed assets.
- Credit Rating: Good history repaying money. Ask other businesses.
What factors affect choosing a source of finance?
- Cost: The rate of interest or APR (Annual Percentage Rate) affects the source chosen.
- Purpose of the loan: Match source of finance to item being bought. Finance should not last longer to pay back than the life of the asset.
- Security: Take into account whether security is required. Increases risk of the source of finance. Collateral is usually a house or business premises.
- Tax implications: Some sources of finance are partly tax deductible EG interest, leasing. Lower Tax=Greater Profit
- Control: Does a source of finance involve giving away a share of the business. This can reduce ownership and risk control.
What are the similarities in finance between business and household?
- Budgeting: Both have to Budget. CFF for business, household budget for house.
- Sources of Finance: Both have to raise finance and use same sources. E.g. Bank O/D
- Controlling: Business engages in stock control to make sure it does not run out of stock and houses manage the food in their house.
- Communications: Both use internal and external communications.
What are the differences in finance between business and household?
- Taxation: Businesses have to calculate their own tax. Households do not calculate theirs. E.g. VAT
- Size/Scale: Businesses are much bigger than a household.
- Mission: Business set up to make a profit. Household set up to take care of the family.
- Manpower Planning: Businesses have to plan for their employee needs and households do not.
Explain the seven functions of a current account.
- Cheques: A written document which gives a bank permission to take a specified sum out of their account and give it to the holder of the cheque.
- Standing Order SO: A fixed amount paid every month on the same date. E.g. Rent
- Direct Debit DD: A variable amount paid out of your account each month on the same date depending on how much you use. EG Electricity.
- Paypath: Employee’s wage paid directly into their current account from their employers account.
- ATM Cards: Functions: Withdraw Money, Check Balance, Pay bills, Phone Credit
- Debit Cards: Allow account holder to pay for items in a shop by transferring money directly to the shop’s bank account from their own.
- Bank Statements: Shows the account holder a list of all transactions in and out for a period of time.
Define Bank Overdraft. Explain its advantages. Explain its uses for a business/household. Discuss it’s cost and whether it is tax deductible.
A short term source of finance where the bank allows you to go into minus money but not beyond a set limit.
Advantages: Quick, easy, convenient.
Household: Uses for holidays or Christmas
Business: Uses it for stock or wages
Cost: High Interest
Tax Deductible: Yes
Define Accrued Expenses. Explain its advantages and disadvantages. Explain its uses for a business/household. Discuss it’s cost and whether it is tax deductible.
A short term source of finance which involves not paying some expenses to use that money for something else.
Advantages: Easy, no action required.
Disadvantages: Damage to reputation.
Business: Stock and Wages
Cost: Late fees, service cut off
Tax Deductible: No
Define Credit Card. Explain its advantages and disadvantages. Explain its uses for a business/household. Discuss it’s cost and whether it is tax deductible.
A short term source of finance where a credit card company pays for an item and you owe the credit card company the money.
Advantages: Easy and quick to use.
Disadvantages: Annual tax
Household: Christmas/holidays
Business: Stock and wages
Cost: High Interest
Tax Deductible: Yes
Define Factoring. Explain its advantages and disadvantages. Explain its uses for a business/household. Discuss it’s cost and whether it is tax deductible.
A short term source of finance where the business sells debts to a factoring company for 80% of the value. You lose 20% but get paid now.
Advantages: Generate cash flow, easy to obtain. Don’t have to chase debtors.
Disadvantages: Make a loss on the debt.
Business: Stock and wages
Cost: Lose % of debt
Tax Deductible: Yes
Define Trade Credit. Explain its advantages and disadvantages. Explain its uses for a business/household. Discuss it’s cost and whether it is tax deductible.
A short term source of finance where purchases are bought on credit and the cash saved is used to pay for other things.
Advantages: Easy
Disadvantages: Lose discounts for not paying early. Damage reputation by paying late
Business: Stock and wages
Cost: Loss of discounts and reputation
Tax deductible: No
Define Hire Purchase. Explain its advantages and disadvantages. Explain its uses for a business/household. Discuss it’s cost and whether it is tax deductible.
A medium term source of finance where you pay a deposit and pay for an asset in instalments. You only own the asset when you finish the last payment but can use it in the meantime.
Advantages: Improves Cashflow
Disadvantages: Don’t own until final payment, will cost more overall.
Business/Household: Medium term assets like a car.
Cost: High Interest
Tax Deductible: Yes
Define Leasing. Explain its advantages. Explain its uses for a business/household. Discuss it’s cost and whether it is tax deductible.
A medium term source of finance where the business rents an asset. Pays monthly and never owns the item.
Advantages: Improves Cash Flow
Business/Household: Medium term assets like a car
Cost: N/a
Tax Deductible: Yes
Define medium term loans. Explain its advantages and disadvantages. Explain its uses for a business/household. Discuss it’s cost and whether it is tax deductible.
A medium term source of finance involving borrowing from a bank and paying it back plus interest in instalments over 2-5 years.
Advantages: Cheaper than hire purchase
Disadvantages: Unpredictable, variable interest rates may go up or down.
Business/Household: Medium term assets like a car
Cost: Interest
Tax Deductible: Yes
Define Savings/Retained Earnings. Explain its advantages and disadvantages. Explain its uses for a business/household. Discuss it’s cost and whether it is tax deductible.
Savings/Retained Earnings is a long term source of finance and is money/reserves set aside in a separate account for an extended period.
Advantages: No risk
Disadvantages: Takes a long time to save, opportunity cost. Reduces Dividend for business.
Household: Weddings or big events
Business: Expanding/Rainy Day Fund
Cost: Opportunity Cost
Tax Deductible: No
Define Grants. Explain its advantages and disadvantages. Explain its uses for a business/household. Discuss it’s cost and whether it is tax deductible.
A long term source of finance which is a free sum of money from the government to put towards a specific purpose. Doesn’t need to be repaid.
Advantages: Free money
Disadvantages: Need to meet certain criteria, only forms a % of finance and business must fund the rest.
Business/Household: Solar Panels
Cost: None
Tax Deductible: No
Define Mortgage. Explain its advantages and disadvantages. Discuss it’s cost, whether it is tax deductible and if it has security.
A long term source of finance which involves borrowing from a bank to buy a house. Paid back in instalments plus interest over a period of 20-35 years.
Advantages: First time Buyers get tax relief. Cheaper interest rate.
Disadvantages: Can lose house if you can’t afford it.
Cost: Interest
Security: Yes
Tax Deductible: No
Define Debentures. Explain its disadvantages. Explain its uses for a business. Discuss it’s cost, whether it is tax deductible and if it requires security.
A long term source of finance which involves a long term business loan where the interest is paid back every month but the lump sum at a future date.
Disadvantages: Can lose asset if you can’t afford it, debt/equity ratio affected.
Business: Buy premises.
Cost: Interest
Security: Yes
Tax Deductible: Yes
Define Equity Capital. Explain its advantages and disadvantages. Explain its uses for a business. Discuss it’s cost, whether it is tax deductible and if it affects control of the business.
A long term source of finance which involves selling shares in the business and receiving finance while giving ownership away.
Shareholders entitled to share of the profits called a dividend.
Advantages: Don’t have to repay the money, don’t have to give a dividend.
Disadvantages: Can lose control of the business, dividends are not tax deductible and organising the selling of shares is expensive.
Business: Buy fixed assets
Cost: Dividend, Expensive to hire brokers
Tax Deductible: No
Affects Control: Yes
Not Tax deductible sources mmenoic.
A Tall Son Goes Marching East
A ccrued expenses
T rade Credit
S avings
G rants
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E Equity Captial
