4.5 Finance

Question 1

In a cash flow forecast, what are the reciepts

Answer 1

Money coming in

Question 2

In a cash flow forecast, how do you calculate net cash

Answer 2

Reciepts - payments. If the figure is negative it will be put into brackets

Question 3

In a cash flow forecast, ow do you calculate closing cash

Answer 3

Net cash + opening cash.
This becomes opening cash for the next month

Question 4

In a cash flow forecast, how would you recognise problematic months

Answer 4

Months where net cash is negative or in brackets

Question 5

In a cash flow forecast, what would you do when there is an expected deficit

Answer 5

Increase receipts:
- have better credit control by offering discounts for early repayments and fines for late repayments
Decrease payments:
- lease or hire purchase instead of buying, short term this saves money but not long term.
- make cutbacks for example making certain employees redundant
- don’t payout dividends.

Question 6

Why would you prepare a cash flow forecast

Answer 6

• Applying for finance: Provided as part of a business plan given to investors (Banks) when applying for loans. Proves business can/cannot repay.
• to help pay bills on time, it can identify high expenditure so business can prepare by arranging a bank overdraft so they don’t go bankrupt
• Benchmarking: Can use cash flow forecast to compare their expected spending to their actual spending. If it’s high they can take action, e.g., reduce payments.
• earn extra interest, if a surplus is anticipated, they can prepare to invest that surplus t increase profits.

Question 7

What are the limitations to a cash flow forecast

Answer 7

• doesn’t account for increases costs like a rise in interest rates
• sales/ revenue may fall due to unforeseen events like a recession
• doesn’t account for unexpected expenses like machine failure = having to buy new equipment

Question 8

What is a cashflow forecast?

Answer 8

A financial plan that shows the business how much money it expects to receive (Receipts) and spend (Payments) over a specific period of time.

Question 9

What are the three different outcomes of a cashflow forecast?

Answer 9

1. Surplus - More cash coming into business than going out.
2. Deficit - More cash going out of the business than coming in.
3. A balanced cash flow - The same amount coming in & out.

Question 10

What is liquidity?

Answer 10

The ability of a business to pay debts as they fall due.

Question 11

What is working capital?

Answer 11

The level of cash available for the day-to-day running of the business. Used to pay current liabilities such as: Bank overdrafts.

Question 12

What is short term finance?

Answer 12

Finance that is available for a period up to one year. It should be repaid within 12 months. Used to finance short term assets, e.g., Stock.

Question 13

What are short term sources of finance?

Answer 13

1. Bank overdraft.
2. Credit card.
3. Trade credit.
4. Factoring.
5. Accrued expenses.

Question 14

What is a bank overdraft?

Answer 14

A facility where a bank allows its customers who have a current account to withdraw more money than they have in their account.

Question 15

What are the advantages of a bank overdraft?

Answer 15

1. Interest is only paid on the amount used.
2. No security/ collateral
3. Flexible

Question 16

What are the disadvantages of a bank overdraft?

Answer 16

1. High interest rates: Interest on the amount used can be high, e.g., 8-14%.
2. Bad penalties: If household or business exceeds agreed limit/fails to pay penalties are applied.
3. Damage credit rating: If not paid back on time.

Question 17

What are accrued expenses?

Answer 17

Short term source of finance, you don’t pay until after service is provided
e.g., Used to pay bills.

Question 18

What is factoring?

Answer 18

Occurs in a business only. Business sells its debts to a factoring firm (Debt collection business) at a discounted price. The factoring firm then collects the amounts owed directly from debtors and makes a profit.

Question 19

What are the advantages of factoring?

Answer 19

1. No security.
2. Immediate cash
3. No loss of control: No impact on ownership.

Question 20

What are the disadvantages of factoring?

Answer 20

1. Expensive
2. On;y for businesses that sell a lot of goods on credit

Question 21

What is trade credit?

Answer 21

When a business receives goods & services from suppliers and pays by an agreed date in the future. The amount of credit available depends on the credit worthiness of the customer.

Question 22

What is medium term finance?

Answer 22

Refers to all sources of finance of one to five years in duration. The finance is used mainly to pay for cars and machines.

Question 23

What are the sources of medium term finance?

Answer 23

1. Hire purchase.
2. Medium term loan.
3. Leasing.

Question 24

What is hire purchase?

Answer 24

Buying an asset, taking delivery of it but paying for it in equal instalments. When the household or business make the final payment, they now own the asset. Its a lump sum followed by equal instalments

Question 25

What are the advantages of hire purchase?

Answer 25

1. Immediate use: Item can be used once a deposit is paid. 2. No security/ collateral

Question 26

What are the disadvantages of hire purchase?

Answer 26

1. Delayed ownership: The buyer does not own the item until the final payment is made. 2. High rate of interest - expensive 3. Risk of repossession: If payments not made.

Question 27

What is a medium term loan?

Answer 27

The borrower takes out a loan from a financial institution (Bank) and repays it in equal instalments within 5 years, with interest paid. Interest rates may be fixed or variable.

Question 28

What is needed for a medium term loan?

Answer 28

1. Business details: Nature of business, e.g., Marketing firm. 2. Loan details: Purpose of loan, e.g., Re-do offices & amount needed. 3. Business reputation: e.g., Credit rating. 4. Business plan: Including cash flow forecast & a balance sheet to ensure business can repay loan.

Question 29

What is leasing?

Answer 29

Renting an asset from a finance company, they never own the asset, if you can’t pay = repossession e.g., Machinery.

Question 30

What are the advantages of leasing?

Answer 30

1. Immediate use. 2. Access to up to date items: e.g., best machines. 3. No security or collateral needed.

Question 31

What are the disadvantages of leasing?

Answer 31

1. Ownership: Will never own item. 2. High cost: Can be more expensive to lease an item if over long time. 3. Risk of repossession: If payments are not made.

Question 32

What is long term finance?

Answer 32

This is finance to cover long term business expenses & is paid back over a term greater than 5 years.

Question 33

What are the 5 sources of long term finance?

Answer 33

1. Retained earnings. 2. Equity capital. 3. Debt capital. 4. Grants. 5. Debenture.

Question 34

What are retained earnings?

Answer 34

Profits saved by a business over time. The firm can reinvest this money back into the business, e.g., to expand.

Question 35

What are the advantages of retained earnings?

Answer 35

1. Large amount of finance: If business is successful and profitable. 2. No financial cost: Using own money. No worry of bankruptcy 3. No security required.

Question 36

What are the disadvantages of retained earnings?

Answer 36

Long saving period: Can take a long time to build up retained earnings. Not available to new businesses

Question 37

What is equity capital?

Answer 37

A business sells shares to investors. The investors become shareholders & have a say in the running of the business & are entitled to dividends (Share of the profits).

Question 38

What are the advantages of equity capital?

Answer 38

1. No security. 2. No financial cost. 3. Repayment: Does not have to be repaid until firm ceases trading. Permanent

Question 39

What are the disadvantages of equity capital?

Answer 39

1. Loss of control: More shareholders. 2. Shareholders may sell shares: If business does not pay sufficient dividends the shareholders may sell their shares. This can result in a fall in share price & potential takeover. 3. Shareholder disputes: e.g., over dividends & can lead to a tarnished business reputation.

Question 40

What is debt capital?

Answer 40

Long term source of finance. Money loaned to a business with the understanding that the money will be repaid, with interest, in a certain time period. No effect on ownership.

Question 41

What are grants?

Answer 41

A grant is money given to a business by a government agency, e.g., LEO or Enterprise Ireland. It does not have to be repaid as long as it's used for the purpose intended.

Question 42

What are the advantages of grants?

Answer 42

1. No repayment. 2. High amounts available: e.g., Business start-up grants. 3. No security.

Question 43

What are the disadvantages of grants?

Answer 43

1. Slow application. 2. Partial funding: May not cover full cost and you bear the rest. 3. Strict conditions

Question 44

What is a debenture?

Answer 44

A long term finance, similar to a mortgage. It is obtained using a firm's assets as security, e.g., Deeds of property. The business makes interest-only payments on debenture & repays the full amount borrowed in one lump sum at a later date.

Question 45

What are the advantages of a debenture?

Answer 45

1. Tax deductible 2. No loss of control: Firm has no say in business operation. 3. Amounts available: High amounts.

Question 46

What are the disadvantages of a debenture?

Answer 46

1. Security required. 2. Risk of losing asset. 3. Increase debt/ equity ratio, increase interest payments, increase gearing = lower profit

Question 47

Advantages and disadvantages of accrued interest

Answer 47

<3: no interest and no security needed X: cut off if don’t pay on time, pay reconnection fee

Question 48

Advantages and disadvantages of trade credit

Answer 48

<3: no interest, no security, no loss of control X: penalties for late payments, can earn a bad credit rating - difficult to get suppliers.

Question 49

What are the three types of household budgets

Answer 49

Fixed Irregular Discretionary

Question 50

How would a household deal with an expected deficit

Answer 50

Increase receipts: -overtime at work or work 2 jobs - rent spare room Decrease payments: - hire purchase instead if buying to save money short term - cut back of expenses like non-branded groceries

Question 51

Benefits of med term loan

Answer 51

Cheaper than hire purchase Interest paid is tax deductible Business remain in control

Question 52

Disadvantages of med term loan

Answer 52

Requires security If the European Central Bank increase interest rates and you have a variable rate loan, repayments will increase

Question 53

Factors bank consider when a business or household apply for a loan

Answer 53

(CRISP) Capacity to repay - look at salary or profits Repayments previously - creditworthiness level of own Investment - demonstrates commitments = less risk Security - do you have assets as collateral Purpose - larger sum = more risk, productive purpose = less risk

Question 54

What should you consider when applying for finance

Answer 54

Cost - interest rates, fees and penalties for missed payments Security needed Control (business only) Tax - dividends are not tax deductible but interest on debenture is

Question 55

What are common activities of households and businesses

Answer 55

Cash flow forecast Control - eg stock control Communication

Question 56

Different activities between household and business

Answer 56

Business has much more complex tax calculations Man power planning Production and public sales