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Chapter Summary 1. Business -> Cash flow forecast -> Purpose, Inflows/Outflows Household -> Budget -> Purpose, Inflows/Outflows 2. Sources of Finance Short, Medium, Long 3. Spreadsheets definition & advantages 4. Qualifying for a Loan Character, Capacity, Collateral and Credit Rating 5. Choosing a Source of Finance Cost, Purpose, Security, Tax Implications, Control 6. Bank Current Account Services Cheque, Standing Order, DD, Paypath, ATM, Laser cards, Bank Statements 7. Similarities and differences between managing household and business finance. Purpose of a CFF Assists financial planning: It identifies when a business might find itself facing a cash flow problem. It identifies times of high expenditure and shortages so that finance can be arranged to deal with the deficit. It identifies future cash surpluses so that the business can make plans to invest this extra money. Financial control: Comparing figures in the cff with the actual receipts and payments figures allows the business to see if it is on target with its cash flow projections aiding financial control. It shows future cash inflows and outflows their sources and timing, which assists in the decision- making process. Loan Requirements: A cff is vital for a business starting up and is essential if making an application for a loan to show that repayments can be made. Ms. Marshall 6th year Business

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Business Cash Inflows Cash Sales Receipts from debtors Interest Grants Share Capital Sale of Assets Tax Refund Business Cash Outflows Purchase of assets Purchases of goods Payments to creditors Payments of taxes Payment of expenses Paying dividends to shareholders Ms. Marshall 6th year Business

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(C) Cash Flow is the lifeblood of any business and its management is critical to business survival. In September 2008, Buttercup Garden Centre prepared the following Cash Flow Forecast. Cash Flow Forecast of Buttercup Garden Centre October to December 2008 October November December Total Receipts Cash Sales 12,500 9,500 10,000 32,000 Credit Sales 2,000 1,500 3,500 7,000 Total Receipts 14,500 11,000 13,500 39,000 Payments Cash Purchases 1,000 2,500 4,000 7,500 Credit Purchases 5,000 2,000 1,000 8,000 Wages 6,000 6,000 7,500 19,500 Equipment 12,000 - - 12,000 Total Payments 24,000 10,500 12,500 47,000 Net Cash (9,500) 500 1,000 (8,000) Opening Cash 3,000 (6,500) (6,000) 3000 Closing Cash (6,500) (6,000) (5,000) (5,000) (i) Explain the benefits to Buttercup Garden Centre of preparing a Cash Flow Forecast. (ii) Based on the information provided above, outline how Buttercup Garden Centre could improve the Cash Flow position of its business. (20 marks)

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Ms. Marshall 6th year Business (B) Balden Ltd prepared the following cash flow forecast: 2007 July August September Total Receipts 70,000 55,000 80,000 205,000 Payments 80,000 45,000 55,000 180,000 Net Cash (10,000) 10,000 25,000 25,000 Opening Cash 3,000 (7,000) 3,000 3,000 Closing Cash (7,000) 3,000 28,000 28,000 (i) Why would this cash flow forecast be prepared by Balden Ltd? (ii) How might management deal with the financial issue highlighted in this forecast? (20 marks) 2007 Q6

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The Business Cash Flow Forecast of Irish Garden Furniture Ltd. is set out below: July August September Total Receipts; 16,000 15,750 14,850 46,600 Payments: 28,000 13,000 24,500 65,500 Net Cash: (12,000) 2750 (9650) (18,900) Opening Cash: 8500 (3500) (750) 8500 Closing Cash: (3,500) (750) (10,400) (10,400) (i) Outline two reasons why Irish Garden Furniture Ltd. prepared the above CFF (ii) Analyse the CFF. Explain, and offer solutions to, any two problems you think the business may have. (20 marks). Ms. Marshall 6th year Business

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HOUSEHOLD INFLOWS/OUTFLOWS PURPOSE OF A BUDGET Inflows Wages/salaries Child Benefit Social Welfare Payments Tax Rebate Loans Outflows Fixed expenditure (mortgage/rent) Irregular expenditure (tel/esb) Discretionary Expenditure (holidays/entertainment). Identifies times of shortage: gives the family time to arrange a bank overdraft so bills can be paid. Identifies times when there will be a surplus: family could invest this money or put it towards a big expense, e.g. home improvements. Highlights areas of overspending: assists a family when they have to cutback. E.g. if electricity bill is high maybe change company. Loan application: shows to the bank they have good planning skills and that finances are properly managed. Ms. Marshall 6th year Business

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HouseholdBusiness Sources Bank overdraft CreditorsCreditors trade credit Accrued Expenses Credit CardTaxation Factoring Uses: Pay day-to-day expensesPurchase stock Purchase clothesPay wages/expenses Purchase servicesPay creditors Ms. Marshall 6th year Business Short term finance is for less than one year and is used to finance short term assets, such as stock and pay expenses.

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Bank overdraft: A short term loan given to current account holders designed to meet short term expenditure needs. The account holder is given permission to withdraw more than the amount in the account, up to a specified amount. Security is not usually required. Interest is calculated on a daily basis on the overdrawn balance. Creditors: Suppliers give an agreed period of credit to their customers, who then sell the goods and services and have use of the money until the invoice has to be paid. No interest is charged and no security is required. However, if the invoice is not paid on time discounts may be lost. Factoring: the business sells its debtors to a bank for cash. The business gets the money up front from the bank. In some cases, factoring with recourse, the business must reimburse the bank if any debtors dont pay up. This gives businesses access to cash immediately, no security is required but the bank charges a high fee. Accrued Expenses: these are expenses that do not have to be paid until after the service has been provided e.g. gas, esb. By delaying the payment of these bills, the business can use the money as a short term source of finance for other purposes. Taxation: the business collects taxes on behalf of the Revenue (e.g. VAT). These taxes are held by the business for a period of time before being forwarded to the Revenue. Credit Card (Household): Allows the card holder to purchase goods and services up to a specified limit. At the end of the month the credit card company sends a statement. No interest is charged if the balance is paid by the due date. Ms. Marshall 6th year Business

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HouseholdBusiness Sources Hire Purchase Leasing Personal LoanTerm Loan Uses: CarsComputers TelevisionsOffice Equipment Electrical AppliancesVehicles FurnitureMachinery Ms. Marshall 6th year Business Medium term finance is for one to five years and is used to finance office equipment, vehicles and machinery.

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Hire Purchase: purchasing assets and paying by instalments over an agreed period of time. Buyer obtains the item immediately but does not become legal owner until the last instalment is paid. The rate of interest is high and is charged on the initial sum borrowed. Leasing: involves the renting of an asset from a finance company. The leasee has he possession and use of the asset but does not own it. No cash lump sum or security is needed. Lease payments can be offset against profits to reduce tax. Medium-term loan: from the bank, repaid in fixed instalments over an agreed period. Borrower must complete a loan application form and the money is granted for a stated reason. Banks may want security on the loan in the event of non payment. Interest on a business term loan can be offset against tax in the profit and loss account. Ms. Marshall 6th year Business

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HouseholdBusiness Sources Long term Loan/MortgageDebenture SavingsShare Capital Retained Earnings Grants Uses:Uses Purchase a housePurchase of land and buildings ExtensionExpansion Buy another business Ms. Marshall 6th year Business Finance that will take more than five years to repay

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Mortgage: a long term loan for a household to buy a house. Available from banks or building societies. The house itself is usually required as security for the loan. Debenture: a long term, fixed interest, loan for a business. Usually used for expansion. The loan is secured on the companys assets. Interest payments on loans are a tax allowable expense in the profit and loss account. The company pays the interest every year and pays the loan back in one lump sum. Savings: the amount of income the family hasnt spent but has set aside to use in the future. No interest, no security needed but it may take a long time to save. Share/Equity Capital: the owners sell some of their shares to investors in return for money. Shareholders receive a say in the running of the company and a dividend if the company makes a profit. There are no interest repayments and no security has to be provided. It is a permanent source of finance. Ms. Marshall 6th year Business

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Sources of finance: long-term Retained Earnings: this is profit not paid out in dividends, but reinvested in the business. It is a free source of finance and no security is required. The business would not want to over rely on this or shareholders could become unhappy. Grant: a sum of money given by the government to a business, which does not have to be paid back, providing that they meet the conditions. E.g. a start up business may be given a grant to help buy machinery. Main providers of grants are Enterprise Ireland, IDA Ireland and the county and city enterprise boards. Ms. Marshall 6th year Business Financial Planning Spreadsheets are used by both households and businesses to help plan their finances. A spreadsheet is computer software that is used for basic accounting. It does maths calculations based on a formula you type in. it allows for a what if? Scenario to be calculated quickly and accurately, e.g. the impact a 10% increase in expenses would have on net profit.

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Ms. Marshall 6th year Business 4 Cs of Qualifying for a Loan Character Credit Rating Collateral Capacity Reputation How long in job/how long business established? Financially viable? Income/profits want to see P60/ Accounts Assets as security on the loan? Credit history Ever bankrupt?

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Ms. Marshall 6th year Business FIVE Factors to consider when choosing a source of finance Cost Purpose Security Tax Implications Control (Business only) MATCH Tax deductible expense? Interest rate?

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Ms. Marshall 6th year Business How can current accounts assist business and household financial management? Paypath Overdrafts Bank statements Standing Orders ATM cards Direct Debits Cheque books Laser/debit cards

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ServiceExplanation PayPathA system for paying wages whereby the money goes directly into the employees account Standing Orders An arrangement with the bank for a fixed amount to go to another account at regular intervals, e.g. monthly loan repayment Direct DebitAllows the automatic payment of varying amounts at regular intervals to someone elses account. E.g. esb bill every two months ATM cardsAllows the cardholder to withdraw money, lodge money without a slip, change pin, buy credit Laser cardsCan be used to buy goods in store and the money is automatically deducted from your bank. Cashback at the till is also available in many places. OverdraftsAllows current account holders to spend more money than thay actually have in their account up to a pre-set limit. Cheque booksNotes asking the bank to pay a certain person or company a set amount into their account. Bank Statements Lists all transactions that have gone through your bank, lodgements and cheques, DD, SO etc. gives your balance at each stage. Can be ordered through the ATM machine. Ms. Marshall 6th year Business

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SIMILARITIESDIFFERENCES Both budget Both should take action to deal with projected surpluses or deficits Both need to keep accurate financial records Both need to raise finance Both can use current accounts Businesses cash flow forecasts can be more complex than the household budget Business cff should include regular payment of VAT and other taxes collected on behalf of the Revenue. Businesses usually dealing in larger amounts. Businesses can access additional sources of finance not available to households. Ms. Marshall 6th year Business

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2011 Short Questions (a) Explain the term short-term finance. (b) Illustrate a business situation where short term finance would be appropriate. 2010 Q6 c (i) Discuss the factors that should be considered when choosing between different sources of finance. (ii) Analyse two appropriate sources of finance for acquiring a delivery van. (30 marks). 2008 Short Questions Identify a suitable source of finance for the purchase of a delivery van in a new business enterprise. Give two reasons for your choice. (10 marks) 2008 Q6 a Managing a business is similar to managing a household in the areas of finance and taxation. Discuss this statement, using examples to support your answer. (20 marks). Ms. Marshall 6th year Business

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2007 SQ 10 marks (a) Define short term finance (b) Outline two short term finance options available for an established manufacturing business. 2005 SQ List four activities that are similar when managing a household and a business. 2005 Q5 Discuss, using examples, the factors a manager should consider when selecting sources of finance for expansion (20 marks). 2003 SQ 10 marks Distinguish between grants and subsidies. + ABQ 2003 Part a. Ms. Marshall 6th year Business