Finance - Functions and role of Money Flashcards
Unit of Account
- Money serves as the common base of comparison that people use to present prices and record debts.
- Money also provides a measure by which we can value different goods and services.
Means of Exchange
- In today’s economy we use notes and coins as money, rather than barter as a medium of exchange.
- Money enables goods and services to be exchange, transactions to be settled and debt to be paid.
- Money avoids the problems of barter, principally the double coincidence of wants which is inefficient and would stifle specialization and division of labor.
Store of Value
- Money acts as a store of value overtime.
- It enables individuals to transfer spending to future time periods secure in the knowledge that will have a future value
Legal Tender
- Accepted to buy goods and services
- Money allows individuals to pay for goods and services late, despite their consumption taking place now
FACTORS AFFECTING THE ROLE OF MONEY - (Personal Attitudes)
- Personal attitudes towards risk and reward, borrowing, spending, and saving.
FACTORS AFFECTING THE ROLE OF MONEY - (Risk averse or Risk Taker)
- Some people are willing to take more risk. E.g. To spend all their money or gamble.
- Others will be more cautious and want to save money to ensure security in the future.
FACTORS AFFECTING THE ROLE OF MONEY - (Life Stages)
CHILDHOOD:
- Features: Zero or low income.
E.g. pocket money, gifts, savings.
- Financial Needs: Most needs are met by parents. E.g. food - Implications: Likely to spend money received. Planned savings by parents.
-
FACTORS AFFECTING THE ROLE OF MONEY - (Life Stages)
- ADOLESCENCE:
- Features: Want greater
independence. May start to earn.
Looking into the future. Saving
for university or driving lessons. - Financial Needs: Higher
expenditure patterns. E,g,
Buying more expensive items or
going out with friends. - Implications: Conflict between
wanting to save now and save
for the future. Still heavily reliant
on parents.
- Features: Want greater
FACTORS AFFECTING THE ROLE OF MONEY - (Life Stages)
MIDDLE AGE:
- Features: Settling down, maybe buying a house, having a family. Hopefully earning a good wage. Self sufficient with dependents.
- Financial Needs: Support self and family. Maybe buy a house or moving up property ladder. Regular incomes and expenditures.
- Implications: Need to earn. Difficult to save for the future but concerned over security at retirement. Likely to spend the majority of income on short to medium terms. E.g. Food, clothing. home. family holiday
FACTORS AFFECTING THE ROLE OF MONEY - (Life Stages)
OLD AGE:
- Features: Loss of income. Reliant on pension. no longer dependents.
- Financial Needs: Day to Day expenditure. Comfortable lifestyle. E.g. Enjoy leisure time.
- Implications - Spending savings. More careful with expenditure. E.g. May downsize house or shop around for groceries.
FACTORS AFFECTING THE ROLE OF MONEY - (Culture)
CULTURE - (including religious and ethical beliefs):
- Different societies will have different opinions on what is right and wrong.
Some societies will talk openly about money, earnings, and wealth whilst others are more reserved or secretive.
FACTORS AFFECTING THE ROLE OF MONEY - (Life Events)
- The personal life cycle varies from person to person such as having a baby, going to university, being made redundant, starting a business.
FACTORS AFFECTING THE ROLE OF MONEY - (External Influences and Trends)
EXTERNAL INFLUENCES - Are the outside of the control of the individual. E,g, You cannot determine them.
- When the economy is in decline the spending power of individuals tends to fall, maybe as a result of job losses.
- People are less willing pr able to spend.
- Banks may be less willing to lend
FACTORS AFFECTING THE ROLE OF MONEY - (Interest Rates)
- Low interest rates encourages borrowing therefore more spending.
- Low interest rates may encourage people to buy on credit.
The reward for saving is low therefore making it less attractive.
Planning Expenditure, Common Principles to be to be considered in planning personal finance:
- Expenditure is the spending of money.
- Example - An outward flow. These are the common principles or guidelines to consider when planning personal finance.
Planning Expenditure, Common Principles to be to be considered in planning personal finance:
TO AVOID GETTING INTO DEBT:
- Debt is when you are spending more than you have. E.g. Expenditure is greater than income.
Debt will increase your costs. E.g. It will have to be paid back with interest.
Planning Expenditure, Common Principles to be to be considered in planning personal finance:
TO CONTROL COSTS:
-By setting budgets you can control your expenditure to ensure it doesn’t spiral out of control.
- Planning in advance can often save money.
Planning Expenditure, Common Principles to be to be considered in planning personal finance:
AVOID BANKRUPTCY:
- Bankruptcy is when an individual legally declare that they are unable to repay their debts.
- Loss of all assets
- Damage to reputation.
- Affects ability to achieve future credit.
Planning Expenditure, Common Principles to be to be considered in planning personal finance:
MAINTAIN A GOOD CREDIT RATING:
- Whenever you apply for credit, whether it be for a bank loam or to buy a car on hire purchase, the creditor will review your credit rating.
- The assesses the degree of risk
Planning Expenditure, Common Principles to be to be considered in planning personal finance:
AVOID LEGAL ACTION OR REPRESENTATION:
- If you failed to make agreed payments the creditor can take legal action, this will be expensive and can damage your reputation.
Loans taken out against an asset. E.g. a house. If payments are missed the bank can repossess the asset. E.g. Take away the house form you.
Planning Expenditure, Common Principles to be to be considered in planning personal finance:
REMAIN SOLVENT:
- To be solvent means to be able to meet your debts.
Planning Expenditure, Common Principles to be to be considered in planning personal finance:
TO MANAGE MONEY TO FUND PURCHASES:
- There will nearly always be time gap between income and expenditure.
- Expenditure needs to be planned so that purchases such as food can be afforded at the end of every month, quarterly bills such as electricity can be paid every three months.
Planning Expenditure, Common Principles to be to be considered in planning personal finance:
GENERATE INCOME AND SAVINGS:
- Interest is paid on savings and therefore generates income, the size of savings therefore increases
- Money can be invested to generate income
- Income may be invested in assets that will be appreciate.
CVC
- Stands for Corporate Venture Capital
- CVC is a subset of venture capital
CVC funding comes from large corporate, who invest in smaller businesses that are relevant and beneficial to the parent group.
Debit Card
- Payment card, which draws funds from a linked business bank account
-Its usually used for covering everyday work-related expenses, such as supplies, travels, equipment, or meals
Interest Rates
- Interest represents the cost you incur for borrowing money.
- Its what banks reward you for depositing money with them.
- Interest rates are typically expressed as a percentage of the total amount of money you borrow or save over the year.
APR
- Stands for Annual Percentage Rate
- This refers to the total cost of your borrowing for a year
- It includes the standard fees and interest you have to pay.
Chip and Pin
- A method of paying for goods and services using a credit card and a secret number instead of s signature.
Different Ways to Pay
CASH (notes and coins)
Advantages:
- Confidence
-Widely acceptance
- Small denominations
Easy to control expenditure
Disadvantages:
- Risk of loss or theft
-Physical transactions only
-Inappropriate for large items of expenditure
Different ways to pay
DEBIT CARDS (Allows you to make purchases by card with the money being taken directly from a current account)
Advantages:
- Secure
-Widely accepted
-Can withdraw cash from various places
Disadvantages:
- Need to monitor spending and bank balance
-If overspend can be costly
Different ways to pay
CREDIT CARDS (Make purchases on credit. E.g. pay now and pay later. Repayments are made following the issue of a statement with a minimum amount)
Advantages:
- Allows you to defer and spread payment
- Widely accepted
-Used online or in store
Disadvantages:
- Interests is charges on the outstanding balance
- If overspend can be costly
Different ways to pay
CHEQUE (A paper transaction giving a bank permission to transfer payment from your account to another account)
Advantages:
- Secure method of payment
-Widely accepted
- Appropriate for postal transactions
Disadvantages:
- Maybe charged for each cheque processed
Costly if cheque is not honored due to insufficient funds
Different Ways to Pay
ELECTRONIC TRANSFER (Online transfer of money from one account to another)
Advantages:
- Quick method of payment
- Appropriate for postal transactions
Disadvantages:
- Need to be carefully set up to ensure the transfer goes to the right place.
Different ways to pay
DIRECT DEBT (Permission given to the bank to make regular payments to a third party upon request)
Advantages:
- Ensures regular payments are not missed
Disadvantages:
- Amount taken will vary making budgeting difficult
- Needs to be re-set up if bank details change
Different ways to pay
STANDING ORDER (Permission given to the bank to make regular payments, of a set amount to a third part upon request
Advantages:
- Secure method of payment
Ensures regular payments are not missed
Disadvantages:
- Money taken regardless of balance
Must be reset or cancelled if anything changes
Different Ways to pay
PRE-PAID CARDS (A cash balance is held on a card which then reduces each time a transaction takes place. E.g. Oyster travel card or school lunch card)
Advantages:
- Secure method of payment
Disadvantages:
- Can be difficult to monitor balance
- Can be used by others without permission
Different ways to pay
CHARGE CARD (Allows for purchases to be paid on a credit card but the total amount is automatically paid direct from a bank account upon receipt of a statement each month)
Advantages:
- Secure method of payment
Avoids long term debt
Disadvantages:
May incur annual or monthly fees
Has to be paid in full regardless of funds
Different Ways to Pay
STORE CARD (Allows a customer to buy on credit in a particular store or group of stores, a minimum payment is required each month upon receipt of a statement)
Advantages:
- May reward frequent shoppers
Additional benefits such as events or discounts
- Can choose how much to pay each month above a minimum amount
Disadvantages:
- May encourage debt
- Interest will be charged on balances not paid off at the end of a month
Different Ways to Pay
MOBILE BANKING (Making transactions using a mobile phone or other portable device such as a tablet)
Advantages:
- Convenient
- increasingly popular
Disadvantages:
- Still developing
- Relies upon the customer having a mobile device
Different ways to pay
BANKER AUTOMATED CLEARING SERVICES (BACS) - (Direct transfer of money from one bank account to another, may take a few days)
Advantages:
- Quick, although time frames vary
- Avoids handling cash
Disadvantages:
- May incur additional charges per transaction
- Care must be taken that all details are correct
Different ways to pay
FASTER PAYMENT SERVICES (FPS) - (Same day transfer of funds from one bank to another to of any amount)
Advantages:
- Quick, although time frame vary
- Secure
- Avoids handling cash
Disadvantages:
- May incur additional charges per transaction
- Care must be taken that all details are correct
Different Ways to Pay
CLEARING HOUSE AUTOMATED PAYMENT SYSTEMS (CHAPS) - (Same day transfer of funds from one bank to another to of any amount)
Advantages:
- Quick
- Secure
- Avoids handling cash
Disadvantages:
- May incur additional charges per transaction
- Care must be taken that all details are correct
Current Accounts
- Type of account offered by banks and building societies for frequent use
Standard Account
- The most common account for individuals assuming they have an OK credit rating.
Features of a standard account
- Can set up direct debits and standing orders
- Issued with a cheque book and debit card
Can pay in cash - E.g. Wages can be paid directly to the account - Can make cash withdrawals
- Pays and charges interest depending upon whether the balance positive or negative.
Types of Current Accounts
- Packages, Premium:
- Offer the same facilities as a standard account but bundled with an additional ‘package of services such as Cash back, free insurance. - Basic:
- Offers only some of the features of a standard account to those with a low credit rating who may otherwise struggle to open an account.
- Customers are seen as high risk and are therefore not offered credit.
- Can still pay money into the account and make cash withdrawals assuming sufficient funds. - Student:
- A current account designed to meet the specific needs of students.
- Features are likely to include - Process to pay university tuition fees, limited overdraft facilities, standing order for accommodation.
Advantages and Disadvantages of current account types
- Standard:
Advantages:
- Widely available
- Range of services
-Overdraft facility
Disadvantages:
- Limited additional benefits
- Charges on overdraft, bounced cheques - Packaged, Premium:
Advantages:
- Range of services
- Additional benefits
- Ease of coordinating different aspects on personal finance
Disadvantages:
- Often charge additional fees
Generic rather than tailored to individual needs - Basic:
Advantages:
- An opening account for those who may otherwise struggle to be accepted by a financial institution
Disadvantages:
- Limited services
- May attach a sigma
Recording Transactions
- It is important that all transactions are recorded accurately to meet all legal requirements, aid the smooth running of a business, accurately meet all legal requirements.
Transactions
- Sales Invoices
- Bank Account - E.g. Cheque payments, Cheque receipts, cash withdrawals
- Taxes - E.g. Corporation tax, VAT, PAYE
- Orders
- Asset register
- Payroll - E.g. Wages and salaries, national insurance, PAYE, Pensions, Ride to work scheme
- Supplier invoices
Management of business
- Planning
- Monitoring
- Controlling
Compliance
- Preventing Fraud.
- Key to petty cash
- Monitor expense claims
- Monitor shrinkage or wastage
levels of raw materials - Internal Audits - E.g. Inventory checks
- Working with external auditors
Compliance with law and regulation
- HMRC compliance in relation to corporation tax, VAT and employee payroll
- Appropriate insurance cover - E.g. Professional identity and employer liability
- IP security and council standards
- Credit legislation
Tax receivables
- Money owned by the business but not yet received resulting from selling on credit.
- Clear payment terms
- Contracts with customers
- Credit checks
- Credit control
Measuring Performance
- Identifying and investigating variances between target or budgeted outcomes and actual outcomes.
- E.g. Target profit v actual profits.
- Inter and intra firm comparisons
- Ratio analysis
- Bench marking
Control
- Assisting with the prevention of fraud.
- Restricted access to key systems
Passwords for important and confidential information
Internal and external audits
Clear procedures
Trade Payable
- Money owned by the business but not yet paid resulting from buying on credit.
- Contract with suppliers
- Age creditor report - an automated report that highlights payments due within a given time period and any overdue payments
- Relies upon data being accurately input upon receipt of invoices
Bank of England
Purpose:
- Produces banknotes and oversee many of the other payment systems that we use. E.g. Debit cards or credit cards.
- They also work to keep the cost of living stable so that the money we have keeps its purchasing power.
Advantages:
- Promoting financial stability and consumer protection as a regulatory authority.
- Making impartial decisions in the interest of the UK economy due to its independence.
Fostering financial innovation and technological advancements to enhance the efficiency and resilience of the financial sector.
Disadvantages:
- Ignoring the credit boom and bust and house price increases, focusing on CPI inflation.
- Keeping interest rates too high for too long
- Inflation often being above the target.
Banks
Purpose:
- Investing, manage money, facilitate payments, currency exchange, support the economy.
Advantages:
- Safety of public wealth
- Availability of cheap loans
- Propellant of economy
- Development in rural areas
Disadvantages:
- Strict approval process for loans, making it difficult to get
- Potential to negativity impacts your credit
- Penalties for missing a loan payment
Building societies
- Saving and Investment, Mortgage lending, Membership ownership, community focus, financial education
Advantages:
- Better rates for saving and mortgages
- Ability to offer more specialist products
- More local and personal service
- Generally higher trust levels compared to banks
Disadvantages:
- They may not offer as many services as banks
They may not be very convenient
- Limited investment opportunities
Credit Unions
- Member savings, affordable loans, member ownership, community support
Advantages:
- Higher deposit interest rates
- Better borrowing rates
- Membership benefits
- More personalisation
Disadvantages:
- Smaller credit limits
- Memberships restrictions
- Fewer programs
- Slower innovation
- Lower technology
National Savings and Investment
Purpose - Secure savings, saving products, encourage savings, tax free options, funding government initiatives
Advantages:
- Government backing them
- Competitive rates
- Tax-free options
- No fees for joining
- Easy online management
Disadvantages:
- Limited product range
- Variable interest range
No guaranteed returns
- Inflation risk
- Withdrawal restrictions
Insurance Companies
Purpose - Risk protection, Policy coverage, Claims payout, Investment opportunities, financial security
Advantages:
- Risk protection
- Policy coverage
- Claims payout
- Investment opportunities
- Financial security
Disadvantages:
- Cost (premium banking)
- Complexity (policies can be difficult)
- Exclusions and limitations
- Premium increases (rate may increase)
Pawnbrokers
Purpose - Quick cash loans, no credit checks, short-term financing, item redemption, sales of unclaimed items
Advantages:
- Quick access to cash
- Flexible terms
- No impact on credit score
- Redemption is possible
Disadvantages:
- High interest rates
- Short loan terms
- Risk of losing items
- Limited loans amounts
- Variable regulations
Payday Loans
Purpose - Quick access to cash, short term solution, simple application process, convenience, no credit checks for financial checks
Advantages:
- Quick access to cash
- Minimal requirement
- Short term solution
- Convenience
Disadvantages:
- High interest rates
- Short repayment period
- Limited regulation
- Negative impact on credit
Features if financial institutions
- Organisations that offer financial services to individuals and businesses
- These services include the ability to deposit or withdraw money, obtain credit and make investments, as well as offering advice on matters of personal and business finance.
Communicating with customers - Methods of interacting with customers
Branch:
- Physical places where the customers will visit to carry out transactions which can be face to face.
- Example - Over the counter transactions or using computerized facilitates, such as automatic teller machines
Advantages:
- Opportunity to build a relationship developing trust and loyalty.
- Transactions can be conducted there and then
- Additional services such as advice can be offered
- Gives the customer a high level of confidence
Disadvantages:
- Need to travel to a branch which is likely to incur travel costs. E.g. Parking fees of public transport.
- Restricted bank opening hours
- May be long queues plus travel time, making the process time consuming
Communicating with customers - Methods of interacting with customers
Online Banking:
- the use of the internet to carry out banking transactions.
Advantages:
- Available 24/7
- High degree of privacy
- Convenient
Disadvantages:
- Takes time at the beginning to set up or apply for
- Not suitable for cash withdrawals
- Increased risk due to cyber crime
- If just an online account, the facilities may be limited
Communicating with customers - Methods of interacting with customers
- When transactions are carried out over the telephone.
Advantages:
- Convenient especially to access basic functions such as checking a balance
- Not additional charges
Disadvantages:
- Full access may be limited to set hours
- Call centers and automated telephone systems can frustrate customers
- Higher risk of fraud and identify theft
Communicating with customers - Methods of interacting with customers
Postal Banking:
- The use of the postal services to carry out paper-based financial transactions.
Advantages:
- Traditional method that many customers will feel comfortable with
- Does not require any additional technology or devices
Disadvantages:
- Can be slow due to the postal system
- Post can get lost
Communicating with customers - Methods of interacting with customers
Mobile Banking:
- The use of a mobile device such as a phone and tablet to conduct financial transactions
Advantages:
- Convenient
- Available 24/7
- No additional charge
Disadvantages:
- May need to download specific apps to access mobile banking for a particular bank
- Higher security risk due to increased risk of loss or theft of mobile devices
Consumer protection in relation to personal finance
- There are laws and organisations responsible for protecting the rights of consumers
- When referring to personal finance, they are there to help ensure that the consumer is not treated unfairly or exploited
Organisations and laws are concerned with protecting consumer rights:
Organisation/ Law:
Financial Conduct Authority
- An independent organisation with a remit to regulate the actions of providers of financial services.
- It is funded by membership fees charged to financial service providers
- The organisation’s work focus on three key areas:
- Authorisation - Permitting financial service providers
to trade
- Supervision - Ensuring procedures and practices are
in the interest of the consumer
- Enforcement - Using powers to ensure standards are
maintained
Organisations and laws are concerned with protecting consumer rights:
Organisation/Law:
Financial Ombudsman Service (FOS):
- An organisation appointed by the government to represent the interests of the consumer in disputed with financial service providers
- It is funded by compulsory fees charged to all regulated financial institutions
The FOS becomes involved in disputes only if they cannot be satisfactorily sorted between the consumer and the financial institution prior to involving the FOS
Organisations and laws are concerned with protecting consumer rights:
Organisation/Law:
Financial Service compensation Scheme (FCS):
- An organisation in the UK that will pay compensation to a consumer of financial services if the service provider is unable to.
- The FCS, for example, protects all savers in banks and building societies up to £5,000
Organisations and laws are concerned with protecting consumer rights:
Organisation/ Law:
Office of fair Trading (OFT):
- A government organisation that was established to regulate all markets, including financial markets.
The OFT’s aim was to encourage fair practices and healthy competition between financial institutions
Organisations and laws are concerned with protecting consumer rights:
Organisation/Law:
Legislation (Consumer Credit):
- These are laws passed by the UK government to enforce the regulation of any firm offering credit to consumers.
Any firm offering credit, for example leasing, hire purchase agreements or credit cards, must be registered with the FCA
Information Guidance and Advice
Guidance/Advice - Citizen Advice
- Organisation run by charities, that offer advice on a wide range of issues both financial and non-financial
- Advice is offered at physical centres as well as online and via email and telephones
- Financial advice covers areas including debt, benefits, banking, pensions and insurance.
Advantages:
- Free services
- Offers face to face as well as online and telephone advice
- Wide range of areas covered.
Disadvantages:
- Trained volunteers are not necessarily professionals in financial issues and therefore knowledge may be limited
Information Guidance and Advice
Guidance/Advice - Independent Financial Advisor (IFA):
- IFAs are professionals who offer independent advice to their clients on financial matters including savings, investments, mortgages and pensions.
Advantages:
- Advice offered by professionals in the field
- Services offered are regulated by the FCA and FOS
- Advisers will take time to understand an individual’s full financial situation
Disadvantages:
- Services will be charged for
- Advice offered is not guaranteed to be 100% up to date or unbaised
Information Guidance and Advice
Guidance and Advice - Price Comparison Websites:
- These websites collate prices for similar goods and services within an industry allowing consumers to make comparisons easily and find the best deals
Advantages:
- Easy to access
- 24/7
- Free service
Disadvantages:
- Not guaranteed to be 100%, up to date, accurate or unbiased
- Do not always cover all the available options
- Potential for bias
Information Guidance and Advice
Guidance/Advice: Money advice service
- This is a government organisation set up to offer free and impartial financial advice in the UK
Advantages:
- Government-funded therefore advice is free and impartial
- covers a wide range of financial matters
Disadvantages:
- Advice is only available online or over the telephone - no physical presence
Can take time to find and understand the exact advice that is being searched for
- Advice can be generic rather than personal
Information Guidance and Advice
Guidance/Advice: Debt Counselors
- This is a professional who offers independent advice on how best to manage debt.
Advantages:
- Advice is offered by professional who specializes in debt management
- Services offered are regulated by the FCA and FOS
Disadvantages:
- Services will be charged for
- Advice will focus just on debt management rather than the whole package of financial concerns
Information Guidance and Advice
Guidance/Advice: Individual Voluntary Arrangements (IVs) Bankruptcy:
- A government organisation that allows an individual to declare themselves bankrupt while agreeing to pay all or part of the money they own to creditors through an insolvency practitioner.
Advantages:
- Helps manage debt repayment with regular payments making budgeting easier
- Independent advice, without bias
Disadvantages:
- Set up and handling fees are charged for the service
- Will affect future credit ratings.
