Chapter 22- Cash Budget & Sources of Finance for a Business

Question 1

Why keep records?

Answer 1

• keep track of money in an organisation

- manage its cash, debtors and stock (items it sells)

Question 2

What is a cash budget?

Answer 2

Shows all the planned cash coming into a business as well as planned cash being spent.

Question 3

How often is a cash flow forecast done?

Answer 3

Month-by-month basis

Question 4

What does a cash flow forecast do?

Answer 4

Helps to identify months where cash may be short in the business.
Helps the business plan for such events and avoid overspending their cash.

Question 5

Examples of planned receipts: (6)

Answer 5

• sales
• received from debtors
• money invested by owners
• selling of fixed assets (buildings)
• loans
• grants

Question 6

Examples of planned payments: (6)

Answer 6

• purchases
• payments to creditors
• drawings (money taken out by owners)
• purchasing fixed assets (buildings)
• repaying loan + interest
• paying expenses (rent) and tax

Question 7

Steps to preparing a cash budget: (6)

Answer 7

1. Prepare template and insert opening cash
2. Record all receipts and total
3. Record all payments and total
4. Calculate Net Cash
5. Calculate planned Opening Cash
6. Calculate planned Closing Cash

Question 8

Matching principle

Answer 8

It is important that when deciding on a source of finance, a business uses the matching principle. This means matching the source of finance with the use of finance.

Question 9

SHORT-TERM: Creditors

Answer 9

Buying good from suppliers and paying for them at a later date (usually 30 days later)

COSTS/ RISKS
No, but you may not get a trade? discount for paying early

Question 10

SHORT-TERM: Credit Cards

Answer 10

Can be used to purchase items immediately and you pay for them later (usually 30 days)

COSTS/ RISKS:
No if you pay your bill on time; if not, you may pay a high rate of interest

Question 11

SHORT-TERM: Bank Overdraft

Answer 11

An agreement with the bank that you can take out more money than is in your account- up to a certain limit

COSTS/ RISKS:
Interest is charged on the extra amount taken out by the business

Question 12

MEDIUM-TERM: Medium-Term Loan

Answer 12

This is money borrowed from a financial institution that must be paid back (with interest) within 5 years

COSTS/RISKS:
Yes, the value of the loan plus interest must be repaid

Question 13

MEDIUM-TERM: Leasing

Answer 13

This is where a business rents an asset from a leasing company e.g. machinery

COSTS/RISKS?
The cost of the lease; the business will never own the asset

Question 14

MEDIUM-TERM: Hire Purchase

Answer 14

A business buys an asset and pays for it in instalments (a fixed amount of money each month). They can use the asset immediately, but do not own it until the final instalment has been paid.

COSTS/RISKS:
Hire purchase is more expensive than loans and leasing, but the asset will be owned when the final instalment is paid.

Question 15

LONG-TERM: Grant

Answer 15

This is money given by the government to a business for a particular purpose

COSTS/RISKS:
No, the grant does not have to be paid back provided it is used for the intended reason

Question 16

LONG-TERM: Capital

Answer 16

This is money that the owner and investors put into the business

COSTS/RISKS:
Dividends (a percentage of the overall profit) are paid to investors at the end of the year

Question 17

LONG-TERM: Long-Term Loan

Answer 17

This is money borrowed by a financial institution that is paid back over more than 5 years

COSTS/RISKS:
Yes; the values of the loan plus interest must be repaid

Question 18

Factors to consider when choosing a source of finance: (4)

Answer 18

1. Purpose
2. Amount
3. Cost
4. Security

Question 19

Factors to consider when choosing a source of finance: (purpose)

Answer 19

Why is the business taking out the loan? Is it for a short/medium/long -term item

Question 20

Factors to consider when choosing a source of finance: (amount)

Answer 20

What can the business afford to pay back?

Question 21

Factors to consider when choosing a source of finance: (cost)

Answer 21

Are there any extra costs (e.g. interest) involved with the chosen source of finance?

Question 22

Factors to consider when choosing a source of finance: (security)

Answer 22

Are the lenders looking for collateral (an asset that is promised to the lender if the source of finance is not paid back by the agreed date) ?