Unit 4: Chapter 13
FINANCE
Learning Outcomes from this chapter
On completion, you should be able to:
• Explain the reasons for preparing a cash flow for a business and a budget for a household
• Calculate a cash flow forecast
• Analyse a cash flow forecast and make recommendations
• Outline methods of dealing with cash flow forecast and house budget problems
• Explain the different sources of finance available to a business and a household
• Apply the different sources of finance to different purposes
• Explain the factors to consider when choosing between different sources of finance
• List the services offered by a current account
Benefits of a cash flow forecast for a
business
Improve financial Take corrective action in advance of a problem
control
Access finance Apply for loans, show ability to repay, attract
investors
Highlight cash Predict cash shortages to adjust spending or
deficits arrange finance
Highlight cash Predict cash surpluses to plan saving or spending
surpluses
Actions that can be taken to address deficits
Arrange short-term finance Arrange bank overdraft, plan to accrue expenses
Adjust receipts Change marketing mix (e.g. new advertising campaign)
Adjust payments Postpone, reduce, delay or spread any planned payments
Seek advice Household (credit union/bank), business (accountant/advisor)
Short-term finance
Finance available for a period of up to one year, repaid within 12 months and used for working
capital needs
Uses: Paying bills (phone, electricity, gas), wages, buying stock
Bank overdraft Negotiate a limit below zero in your current account.
Accrued expenses Delay paying bills for a period to free money for other uses.
Credit card Pay now, get a bill later (high interest if unpaid).
Trade credit Receive goods now, pay supplier later (typically 30 days).
Factoring of debts Sell your debtors to a debt collector for an upfront payment.
Medium-term finance
Finance available for a period of between one and five years
Uses: Machinery, computers, delivery vehicles with a life span of over one year and under five years
Lease Rent an asset (never owning it) so no initial payment is needed.
Hire purchase Buy an asset over time, ownership only transfers after final payment is made.
Medium-term loan Take a loan for between one and five years; repay in regular, equal instalments
that include interest.
Long-term finance
Finance available to fund the long-term running of the business or household (over five years)
Uses: Fund long-term expansion/growth (new store, warehouse, long-term machinery)
Reserves Profits left over from trading are reinvested; retained earnings
Government grant Money provided to a business for a purpose; does not have to be repaid
Long-term loan Repayable in regular monthly instalments plus interest to a bank;
debenture interest repaid regularly, and initial principle repaid at the end
Share capital Share capital raised by selling shares to investors (shareholders)
Factors when choosing between different
sources of finance
Cost Compare expense measured by APR, extra fees/charges
Purpose Match source to use (e.g. overdraft for short-term use, such as paying bills)
Amount Reserves may be limited in size: a long-term loan may be needed
Equity capital gives voting rights away: could lose control of an important
Control asset which is used as collateral
Collateral Assets may be required to access a loan (assets used as security)
What affects the ability to qualify for a
loan?
Collateral Value of the security available that can be
repossessed if loan cannot be repaid
Capacity Ability to repay: cash flow forecast
(business), budget (household)
Creditworthiness, reputation, credit rating
Character (trustworthiness of borrower)
Purpose Size of loan will increase risk; will purpose
actually increase revenue?
Business versus household finances
Similarities Differences
Both need to plan for the future to help control Businesses have access to more sources of
their finances: cash flow forecast (business), finance (e.g. debentures, trade credit).
budget (household).
Both need to keep accurate records and file
important documents; this helps when applying Businesses usually deal with much greater
for a bank loan. amounts of money (e.g. debentures).
Both need to match the purpose of the finance Businesses need to include additional
to the length of the finance (e.g. bank overdraft expenditure (e.g. VAT and PRSI, which they
for short-term needs). collect and give to Revenue).