Household and Business Management: Cash Flow Forecasts and Business Finance

Question 1

Cash Flow Forecasts for Households

Answer 1

Households generally budgets to predict future incomes and future expenditures in order to have enough cash to cover costs. This budget includes the money the household expects to make (income) and payments (expenditure). There are three types of expenditure- Fixed, Irregular, Discretionary.

Question 2

Cash Flow Forecasts for Businesses

Answer 2

Businesses use cash flow forecasts to predict how much money a business will have in the future. It does this by subtracting expected future payments from expected future income. Money coming in is called receipts, and money going out is called payments.

Question 3

Why does a household/business need cash flow management?

Answer 3

Financial control mechanism
Avoid cash flow problems
It lets us know in advance when there will be a deficit, It lets us know in advance when there will be a surplus
Identifies times when high expenditure may be needed
It can set a target
The cash flow forecast can be used as a tool in applying for a loan.

Question 4

Avail of a short-term source of finance

Answer 4

Company X could arrange a bank overdraft facility with its bank to finance problem months where the business is running a deficit. The overdraft facility provides extra flexibility for Company X when it needs it most.

Question 5

Adjust receipts

Answer 5

Its receipts could be increased by changing its marketing mix, e.g. lowering price to sell more, increasing the price depending on elasticities, designing new products or more effective promotion campaigns/reducing period of credit given to debtors/cash sales only.

Question 6

Adjust payments

Answer 6

The business could decrease its cash payments by sourcing cheaper suppliers, restructuring loan repayments or asking employees to take a wage decrease etc…

Question 7

Sell of an asset

Answer 7

• Look to sell of an asset to raise capital. Company X could look to sell an asset such as a machine that is now obsolete to get an instant cash injection into the business

Question 8

Short Term Finance

Answer 8

Bank Overdraft	
Credit Card
Accrued Expenses	
Factoring		
Trade Credit

Question 9

Medium Term Finance

Answer 9

Medium Term Loan
Hire Purchase
Leasing

Question 10

Long Term Finance

Answer 10

Mortgage
Savings
Retained Earnings
Equity Capital
Grants
Debentures
Sale and Leaseback
Venture Capital

Question 11

Bank Overdraft (Business and Household)

Answer 11

• This is a short-term loan given to a current account holder for a period of less than one year. The current account holder gets permission from the bank to withdraw more money from their account than they have in it (up to a certain limit).
• Interest is charged on the amount outstanding every quarter (i.e. every three months) and this interest is calculated on a daily basis.

Question 12

Credit Cards (Business and Household)

Answer 12

• A customer will pay for goods and services using credit cards at the point of sale
• The credit card company pays the supplier, and the customer will pay the credit card company at the end of the agreed period with interest charged if the full balance is not paid

Question 13

Accrued Expenses (Household and Business)

Answer 13

• Accruals are services which we have the use of now but which we pay for later, eg. telephone, electricity, or gas bills. It is essentially the delaying of the payment of bills to free up money to spend on other items.

Question 14

Factoring (Business Only)

Answer 14

• A Debtor is someone who we sell goods or services to now, but who we receive payment from later.
• Debtors pay us at different times, some in two weeks, some in a month, some in two months; this makes it difficult to plan expenditure.
• Firms can thus sell their debtors to a factoring firm and factors charge for the service

Question 15

Trade Credit (Business Only)

Answer 15

• Purchasing goods now and paying for them later is called buying on credit
• Selling goods now and receiving payment for them later is called selling on credit
• Trade Credit gives a company time to manufacture, sell and get paid for their products before they have to pay their creditors

Question 16

Medium Term Loan (Business and Household)

Answer 16

• Here, a borrower takes out a loan from a financial institution and repays it with interest over an agreed period of time
• The interest repayments can be fixed or variable and it is important for the household or business to shop around for the best rate
• Loans given to households are called personal loans
• Loans given to businesses are called medium term loans

Question 17

Hire Purchase (Business and Household)

Answer 17

• This is a form of credit which allows customers to have immediate use of goods while paying for them over an agreed period of time in instalments. The customer pays an initial deposit and then instalments. The customer only owns the asset when the last instalment has been paid
• It is used to buy assets such as motor vehicles, equipment, etc…
• It carries a high rate of interest and is thus an expensive form of finance
• There are strict conditions attached to Hire Purchase which are set down in a written contract for the customer

Question 18

Leasing (Business and Household)

Answer 18

• Leasing is like renting. The asset acquired is at all times owned by the lessor who rents it to the lessee over an agreed period of time in return for regular payments. Ownership thus never passes to the person renting it (the lessee). Leasing is cheaper than hire purchase as no change of ownership is involved
• A lease agreement involves the payment of a deposit and a number of fixed deposits being paid (the number of which is agreed in advance. At the end of the agreement the asset is returned to the seller

Question 19

Mortgage (Household)

Answer 19

• A Mortgage is a loan to buy a house or property that can be repaid over a period of 20 – 35 years. The borrower repays the loan and interest by the end of this time. This type of finance doesn’t relate to the businesses
• The mortgage is secured on the house or property (a farm). If the borrower fails to repay the loan, the title deeds of the house or property are given to the lender. The House/property can be sold and the proceeds used by the lender to pay off the loan.

Question 20

Savings (Household)

Answer 20

• Savings is money the household has not spent but saved for the future. A household will usually put their savings in a financial institution to earn interest, with the savings used to purchase assets like an extension to the house

Question 21

Retained Earnings (Business)

Answer 21

• These can be known as reserves and mean that profits are ploughed back into the business to assist its growth
• When a business makes profit, these profits don’t have to be paid to the directors or paid to the shareholders; they can be put on deposit or invested. These profits build up over a period of time, and are effectively the same as savings for a household.

Question 22

Equity Capital (Business Only)

Answer 22

• Equity is funds that have been invested in the business by shareholders with the hope of a future dividend
• Business owners sell shares to investors to raise more capital, and the investors have a say in the running of the business

Question 23

Grants (Business Only)

Answer 23

• Government grants are non-repayable amounts of money given to enterprises by state agencies which aid certain activities such as purchasing factories and machinery or train workers that help develop the business
• With increasing Government cutbacks, conditions are imposed when issuing grants. These can come in the form of performance targets. E.g. a certain amount of money can be given to a company provided a specified number of people are employed. Failure to meet these targets can result in the demands for the grant to be repaid.

Question 24

Debentures (Business Only)

Answer 24

• This is long term finance similar to a loan. A firm will use their assets to borrow a large sum and pay interest only on that sum for a period of time. At the end of that time, they then pay the full amount back in one lump sum

Question 25

Sale and Leaseback (Business Only)

Answer 25

• This is when a business sells an asset and then leases it back from the buyer
• This will allow the business to still use the asset while at the same time getting extra finance

Question 26

Venture Capital (Business Only)

Answer 26

• This is provided as start-up (seed) capital for new business enterprises and as development capital for existing businesses in which there is a higher than average degree of risk. The risk will be high but the possible returns on profit will also be high
• The venture capital company will usually want to place members of its own staff on the board of directors to oversee the new firm’s progress. This is known as a partnership approach and raises the image of the business with customers, suppliers and banks
• Once the business becomes successful, the venture capital company sells its shares for a profit

Question 27

How Should the Source of Finance be selected?

Answer 27

Amount 
Purpose 
Cost 
Collateral
Timing of Repayments 
Conveniance 
Control

Question 28

Purpose of the loan

Answer 28

If it is productive and low risk, the bank will look more favourably on the loan.

Question 29

Ability to repay

Answer 29

Examine the income- p60 for house/profits for business.

Question 30

Security for the loan

Answer 30

Look at collateral- e.g. title deeds of property, share certificates in company.

Question 31

Banking record

Answer 31

A good banking history will be looked upon favourably.

Question 32

Credit rating

Answer 32

The bank may check a borrower’s credit rating with a reputable agency that specialises in this area. If the rating is good, the bank will advance the loan.

Question 33

Business plan

Answer 33

Case of a business- growth potential will be looked upon favourably

Question 34

Own investment

Answer 34

A bank which is asked to loan money will be more assured if the person is investing a significant amount themselves.