U4 Ch.17 Finance

Question 1

Reasons to prepare cashflow forecast

Answer 1

1. Avoid Deficits (identify and take corrective action to deal with cash shortfall. e.g. arrange short term finance)
2. Improved financial control (help live within its means. Acts as financial control mechanism to measure actual vs planned. Encourage sensible planning)
3. Raise finance (integral part of business plan given to banks + other investors to gain finance)
4. Plan for positive net cashflows (use suprlus funds on deposits with bank or make expension)

Question 2

Ways to deal with cash flow forecast deficit

Answer 2

1. Increase Cash reciepts (sell investments / sale or discounts to encourage spending)
2. Obtain Finance (acquire for short term debts, interest payable on the reducing balance. E.g. Bank overdraft)
3. Adjust payments (spread out over longer periods / reduce expenses(cheaper suppliers) / reduce dividends)
4. Incentives (for early payment from debtors)

Question 3

Cash Flow Forecast

Answer 3

Part of financial planning. Shows business how much money it expects to receive(receipts) and spend(payments) over a specific period of time.

Question 4

Household Budget

Answer 4

Financial plan of future income and expenditure of a household

Question 5

Fixed Expenditure

Answer 5

Amount remains the same regardless of usage

Question 6

Irregular Expenditure

Answer 6

Amount paid varies based on usage

Question 7

Discretionary Expenditure

Answer 7

Expenditure on non-essential items

Question 8

Reasons for preparing household budget

Answer 8

1. Identifying surplus
2. Identifying deficit
3. Applying for loans

Question 9

Different term lengths of finance

Answer 9

1. Short (repaid over less than 1 year)
2. Medium (repaid over 1-5 years)
3. Long (repaid over more than 5 years)

Question 10

Short term sources of finance

Answer 10

1. Bank Overdraft
2. Credit Card
3. Accrued Expenses
   Business ONLY:
4. Factoring
5. Trade Credit

Question 11

Bank Overdraft
+ features

Answer 11

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

Question 12

Credit Card
+ features

Answer 12

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

Question 13

Accrued Expenses
+ features

Answer 13

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

Question 14

Factoring
+ features

Answer 14

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

Question 15

Factoring without vs with recourse

Answer 15

1. Without recourse: business will not have to pay back factoring firm if debtor fails to repay them
2. 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

Question 16

Trade Credit
+ features

Answer 16

when a business receives g or s from suppliers and pays by agreed date.
-no interest
-no security
-immediate use
-can damage credit rating

Question 17

Medium Term Sources of finance

Answer 17

All are for BOTH
1. Hire Purchase
2. Medium-Term Loan
3. Leasing (renting)

Question 18

Hire purchase
+ features

Answer 18

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

Question 19

Medium Term Loan
+ features

Answer 19

(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

Question 20

Medium-term loan application

Answer 20

-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)

Question 21

Leasing / Renting
+ features

Answer 21

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

Question 22

Long term sources of finance for household

Answer 22

1. Mortgage
2. Savings

Question 23

Long term sources of finance for business

Answer 23

1. Retained Earnings
2. Equity Capital
3. Grants
4. Debenture
5. Sale and leaseback
6. Venture Capital

Question 24

Mortgage
+features

Answer 24

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

Question 25

Creditworthiness

Answer 25

Ability to borrow money or pay later for g + s. Considered when deciding whether eligible for credit

Question 26

Tracker Mortgage

Answer 26

Variable Rate mortgage when interest rate follows interest rates charged by ECB

Question 27

Savings + features

Answer 27

Cash household has not spent but saved usually in a deposit account earning interest -interest is subject to dirt -free form -no security / application

Question 28

Retained Earnings + features

Answer 28

Profits business has saved over time -no cost(own money) -no security -takes long time to build -can be quite large amount

Question 29

Equity Capital + features

Answer 29

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

Question 30

Grants + features

Answer 30

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

Question 31

Debenture + features

Answer 31

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

Question 32

Sale and leaseback + features

Answer 32

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

Question 33

Venture Capital +features

Answer 33

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

Question 34

Factors when choosing a source of finance

Answer 34

1. Purpose (s-t needs = s-t source and l-t needs = l-t sources give examples e.g. day-to-day running or expansion) 2. Business size (large businesses can acquire finance easier) 3. Amount required (large = l-t source) 4. Cost of finance (debt finance is costly with repayments whereas equity finance and savings aren't) 5. Security/collateral required 6. Risk (conduct risk analysis 7. Control effect

Question 35

Factors when considering assessing loan application

Answer 35

1. Creditworthiness 2. Ability to repay (business plan) 3. Purpose 4. Security (will it be able to recover loan if can't be repayed)

Question 36

Current Account

Answer 36

For day-to-day banking. Used for managing cash inflows and outflows. Offers range of services including lodging and withdrawing cash

Question 37

ATM

Answer 37

Automated teller machine

Question 38

PIN

Answer 38

Personal Identification Number

Question 39

PAC

Answer 39

Personal Access Code

Question 40

IBAN

Answer 40

International Bank Account Number

Question 41

BIC

Answer 41

Bank Identifier Code

Question 42

Deposit Account

Answer 42

for savings

Question 43

Bank Statement

Answer 43

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