Financial Planning For Organisations Flashcards
Explain 3 things that we can do to deal with a cash flow deficit
Increase income: This can be difficult to do, especially in the short term. The organisation might have a sale to increase sales revenue or they could try to collect money due to them from debtors.
Reduce expenditure: The organisation could cut costs in order to limit its spending, being careful to reduce non-essential spending first. For example, it may be possible to buy cheaper raw materials or reduce operating hours and costs.
Borrow: The organisation might choose to take out a loan and borrow the money needed to make up the shortfall.
Explain 3 things that you can do to deal with a cash flow surplus
Save or invest it until it is needed: This is relevant for organisations whose income is seasonal.
Repay an existing loan: This will improve future cash flow by reducing future interest and loan repayments.
Fund some extra expenditure: For example, use it to buy assets or increase staff pay.
Name and explain 3 factors that influence the source of finance
The purpose of the finance: Is it for day-to-day purposes or is it to fund long-term goals or the purchase of fixed assets?
Cost of finance: Borrowers should compare the annual percentage rate of each possible source.
Control: How will the source of finance impact on ownership and control of the organisation? For example, issuing new shares will allow new shareholders to have a say in how an organisation is run.
Name and explain two short term sources of finance for an organisation
Bank overdraft:The organisation can withdraw more money from their current account than they have in it. The overdraft must be arranged in advance. The bank will limit the amount that can be withdrawn.
Trade creditor:A creditor is a person or business we owe money to, usually because we have bought goods or services on credit from them.
Name and explain 2 medium sources of finance for an organisation
Leasing:Leasing means renting an asset over a number of years. The lease agreement allows a business to have possession and use of the asset provided they make fixed regular payments to the leasing company.
Hire purchase:In hire purchase, the purchaser pays an initial deposit and a finance company pays the balance to the seller. The purchasing business then pays back the finance company with an agreed number of fixed regular payments.
Name and explain 2 long term sources of finance for an organisation
Grants:A grant is money provided by the government, local authority or EU. It may be used to pay for staff training, buy machinery or create employment.
Mortgage:Specifically used to purchase property. Typically repaid over 20-30 years.
