U4 Ch.17 Finance Flashcards
Reasons to prepare cashflow forecast
- Avoid Deficits (identify and take corrective action to deal with cash shortfall. e.g. arrange short term finance)
- Improved financial control (help live within its means. Acts as financial control mechanism to measure actual vs planned. Encourage sensible planning)
- Raise finance (integral part of business plan given to banks + other investors to gain finance)
- Plan for positive net cashflows (use suprlus funds on deposits with bank or make expension)
Ways to deal with cash flow forecast deficit
- Increase Cash reciepts (sell investments / sale or discounts to encourage spending)
- Obtain Finance (acquire for short term debts, interest payable on the reducing balance. E.g. Bank overdraft)
- Adjust payments (spread out over longer periods / reduce expenses(cheaper suppliers) / reduce dividends)
- Incentives (for early payment from debtors)
Cash Flow Forecast
Part of financial planning. Shows business how much money it expects to receive(receipts) and spend(payments) over a specific period of time.
Household Budget
Financial plan of future income and expenditure of a household
Fixed Expenditure
Amount remains the same regardless of usage
Irregular Expenditure
Amount paid varies based on usage
Discretionary Expenditure
Expenditure on non-essential items
Reasons for preparing household budget
- Identifying surplus
- Identifying deficit
- Applying for loans
Different term lengths of finance
- Short (repaid over less than 1 year)
- Medium (repaid over 1-5 years)
- Long (repaid over more than 5 years)
Short term sources of finance
- Bank Overdraft
- Credit Card
- Accrued Expenses
Business ONLY: - Factoring
- Trade Credit
Bank Overdraft
Bank allows customers with current account to withdraw more money than they have in it up to a limit.
-No Security
-High Interest Paid on amount used
-Fast
-Failing to repay leads to penalties and damage to credit rating
Credit Card
Used at point of sale and amount is repayed to credit card company within an agreed time frame.
-No interest if repaid on time
-High interest on outstanding balance
-Secure
-Accepted worldwide
Accrued Expenses
When a supplier of services allows business/household to use service and pay later. E.g. electricity and gas
-free (no interest)
-no security
-cash available for other uses since paid in arrears
-services lost if not paid on time
Factoring
business sells sales invoices (debtors) to a factoring firm at a discounted price. Factoring firm then collects amounts owed directly and makes a profit
-No security
-immediate finance
-no loss of control
Factoring without vs with recourse
- Without recourse: business will not have to pay back factoring firm if debtor fails to repay them
- With recourse: business will have to reimburse factoring firm if debtor fails to pay amount owed. Means business still has a risk of bad debt after selling to firm
Trade Credit
when a business receives g or s from suppliers and pays by agreed date.
-no interest
-no security
-immediate use
-can damage credit rating
Medium Term Sources of finance
All are for BOTH
1. Hire Purchase
2. Medium-Term Loan
3. Leasing (renting)
Hire purchase
Hire purchase firm buys item for buyer and is repaid in instalments beginning with an initial deposit. buyer doesn’t legally own item until last instalment.
-High interest by Hire Purchase firm
-no security
-Immediate use(useful if can’t afford currently)
-risk of repossession
Medium Term Loan
(Personal Loan). Taken out from financial institution and repayed with interest at regular intervals between 1 to 5 years. May have fixed or varied interest rate
-Lower interest than HP
-No security
-No loss of control
-risk of repossession
Medium-term loan application
-needs nature of business / personal details
-needs purpose and amount required
-creditworthiness and/or business reputation
-(Business plan for businesses is needed)
-(Employment details for households is needed)
Leasing / Renting
Lessee enters into a lease agreement with owner of asset(lessor). Lessee makes regular repayments to the lessor for period of time while they use asset
-leasing can be more expensive than buying if it is over long period
-No security needed
-Immediate use
-no ownership
Long term sources of finance for household
- Mortgage
- Savings
Long term sources of finance for business
- Retained Earnings
- Equity Capital
- Grants
- Debenture
- Sale and leaseback
- Venture Capital
Mortgage
for purchasing property. Repayed between 20 to 35 years at fixed/variable interest rate.
-Interest can increase if variable
-Property is security
-Low rate compared to other forms of finance
Creditworthiness
Ability to borrow money or pay later for g + s. Considered when deciding whether eligible for credit
Tracker Mortgage
Variable Rate mortgage when interest rate follows interest rates charged by ECB
Savings
Cash household has not spent but saved usually in a deposit account earning interest
-interest is subject to dirt
-free form
-no security / application
Retained Earnings
Profits business has saved over time
-no cost(own money)
-no security
-takes long time to build
-can be quite large amount
Equity Capital
business sell shares to investors who become shareholders and have a say in running of business, vote at AGM and are entitiled to dividends.
-no financial cost
-no security
-no repayment
-loss of control
-shareholder disputes can arise
Grants
Sum of money given by government agency, typically used to fund expansion. Doesn’t have to repaid as long is used for intended purpose
-no financial cost
-no security
-criterias must be met
-slow application process
Debenture
Long-term debt finance similar to loan where business repays interest over time and then repays amount borrowed in one lump sum
-fixed interest repayments
-business asset as security
-no loss of control
-increase gearing
Sale and leaseback
Business sells an asset and leases it back from buyer. Allows continued use while gaining extra finance
-no loss of control
-reduces assets
-may not be worth it as extended use may lead to more money being paid than was earned
Venture Capital
Venture Capital firms in vest money(capital) into new business where there is potential for high ROI. Invest for share in business and sell once business becomes successful.
-No interest
-Control lost
-Profits shared with firm
-Expertise
Factors when choosing a source of finance
- Purpose (s-t needs = s-t source and l-t needs = l-t sources give examples e.g. day-to-day running or expansion)
- Business size (large businesses can acquire finance easier)
- Amount required (large = l-t source)
- Cost of finance (debt finance is costly with repayments whereas equity finance and savings aren’t)
- Security/collateral required
- Risk (conduct risk analysis
- Control effect
Factors when considering assessing loan application
- Creditworthiness
- Ability to repay (business plan)
- Purpose
- Security (will it be able to recover loan if can’t be repayed)
Current Account
For day-to-day banking. Used for managing cash inflows and outflows. Offers range of services including lodging and withdrawing cash
ATM
Automated teller machine
PIN
Personal Identification Number
PAC
Personal Access Code
IBAN
International Bank Account Number
BIC
Bank Identifier Code
Deposit Account
for savings
Bank Statement
Document sent by bank to customers on a regular basis hat shows all transactions that took place within a time period and the balance at beginning and end of period
