Business Finance

Define the term financial institution

➢ Financial Institutions are businesses that specialize in providing financial services such as
investments, borrowing, deposits (savings), etc. to individuals and businesses.

Identify the various financial institutions

There are Bank and Non-Bank Financial Institutions.
● Commercial Banks (kelene) eg: Bank of Nova Scotia, First Caribbean (CIBC), NCB
[Fantasia]
● Central Bank eg: Bank of Jamaica (BOJ)
● Development Banks eg: Development Bank of Jamaica Ltd (DBJ)

Non-Bank Financial Institution

Define the term Non- Bank financial institution

The term non-bank financial institution refers to companies that offer financial services, but do
not hold banking licenses.

Examples of Non-Bank Financial Institutions

● Credit Unions eg: C&WJ Co-operative Credit Union, First Heritage Credit Union,
Jamaica Broilers Credit Union [Fantasia]
● Insurance companies eg: JN General Insurance Company Limited (JNGI), Globe
Insurance Company of Jamaica Ltd.
● Building societies eg: Victoria Mutual Building Society, Scotia Building Society, Jamaica
National Building Society
● Brokerage Firms eg: Barita Investments Limited, Credit Union Fund Management
Company (CUFM), JMMB Securities Limited [Fantasia]
● Micro-lending agencies eg: Access Financial Services Limited, JN Small Business Loans
Limited, Micro Credit Limited.
● Government agencies eg: Port Authority of Jamaica, Jamaica Civil Aviation Authority,
Jamaica Information Service (JIS)

State the functions and services offered

a) Commercial banks
- Financial institutions that accept deposits, make loans to individuals and
businesses and offer other banking services, such as processing payments
- Provide important financial services to both individuals and businesses

Functions of the commercial banks

 ● Accepting Deposits from customers
● Providing advance loans to individuals and firms
● Processing payments made and received by customers
● Issuing bank drafts and bank cheques
● Investment services
● Safekeeping of documents and other items in safe deposit boxes (Kelene)

Services offered by the Commercial Bank

● Night safe deposits - a secured bank drop box where account holders can deposit money
outside of banking hours.
● Online Banking- enables customers to manage their bank accounts via the internet.
● Advisory Services - Provided by banks for their customers to get financial advice as it
relates to mortgages, loans, investments, etc.
● Credit Cards and Debit Cards - Banks offer customers credit and debit cards to enable
them to buy goods and services using the cards.
● Trustee Work - Banks and other financial institutions can be appointed to solve issues on
behalf of trust beneficiaries
● Deposit Boxes
● Automated Teller Machine (ATM)/Automated Banking Machines (ABM) Services
● E-trade
● Settlement services
● Remittances services

b) Central bank
- A monetary authority set up by a national government to issue notes and coin,
control the money supply and regulate the banking system

Functions of the Central Banks

● Issue notes and coins
● They act as the banks’ banker
● They act as the government’s banker
● They are lender of last resort
● They operate the government’s monetary policy
● They are the regulator of the banking system (Kelene)
 c) Credit Unions - A credit union is a type of financial cooperative that provides traditional
banking services.
OR
Organisations of people, with common interests or aims, who pool their savings.

❖ Return profits to their members in the form of dividends, competitive loan rates and
services.
❖ Do business with their members only.
❖ Encourage savings and provide consumers credit at favourable interest rates.
❖ Loans are available to facilitate starting small businesses. Also, personal loans are
available for:
● medical expenses,
● home repairs,
● purchase of household appliances,
● home ownership,
● and higher education. (Fantasia)

d) Insurance companies - A financial institution that provides a range of insurance policies

to protect individuals and businesses against risk of financial loss.
Functions:
● Provide insurance to business and individuals
● Cover the risks of their customers and provide compensations

e) Government Agencies -
● Provides funding for business, including enterprise of all kinds
● Also enables borrowers to consolidate debt

Services offered by financial institutions:

● Online banking
● Credit and debit cards
● Night safe deposits
● Cheques
● Money Transfer
● Deposit boxes
● E-trade
● ATM/ABM services
● Advisory services
● Trustee work
● Settlement services
Explain the term financial regulatory bodies

A Financial Regulatory Body is appointed by the Government to establish national standards for
financial activities, made to enforce the regulations and licenses set in place to ensure easy and
efficient financial services.

Identify regulatory bodies

Central Bank
Jamaica Deposit Insurance Corporation (JDIC)
Financial Services Commission (FSC) of Jamaica

State the roles and functions of regulatory bodies

Central Banks

- Oversees printing of notes and coins for a specific country.

- License other banks and financial institutions
- Try to curve inflation

Jamaica Deposit Insurance

- A scheme whereby the government guarantees the money held in the banks.
- Money deposited of regulated by the Bank of Jamaica (BOJ)
- Creates confidence in the financial system as depositors and savers know that their
money is safe in a commercial bank.

Financial Services Commission of Jamaica

- They look at financial stability

- The FSC also handles customer complaints and provides the public with important
financial information
- Monitors the pension sector
- License companies who wish to sell insurance and investments

NB: General Functions of Regulatory Bodies - To enforce regulations and licenses of various
financial activities including the depositary lending collection and money transmission activities.

Roles of the Regulatory Bodies

 - To monitor the activities of banks, credit unions, pension funds, insurance companies and
investment companies.
- Controlling the activities of these financial institutions by setting rules.
- Guiding financial institutions.

Describe the relationship between financial institutions and regulatory bodies.

- The regulatory bodies provide guidance and regulations for financial institutions.
- They regulate commercial banks.
- There is a connection between their liquid assets.
- Change in the minimum reserve requirements. This speaks to the minimum amount of
money that must be held in the commercial banks stated by the central banks.
- They are related via supervision (insurance).

Outline ways used by individuals to manage personal income.

Budget - A plan for the future that involves planning for personal income and/or expenditure and
savings for the period.

Personal Income - the money that a person receives in a particular period of time.

Investment - the purchase of assets in order that these assets will earn future income for you.

OR

Spending by a business, over a period, on new capital including buildings, machinery, and
equipment. It also includes the net additions to stock such as raw materials and consumer goods.

Savings - This refers to the money set aside or not spent from one’s personal income.

HOMEWORK

Explain the importance of a Budget.

Prepare a sample budget.

Outline some examples of investments, such as bonds, stocks, unit trust, mutual funds, etc.
Explain the term financial advising.

Outline forms of savings such as sou sou (partner), deposits in financial institutions, short-term
deposits, fixed deposits.

• Fixed Deposits - a long-term, tax-free savings account, which offers a fixed interest rate which
is higher than a regular savings account, depending on how much you save.

• A stock is a type of investment that represents an ownership share in a company.

• A bond is a fixed income instrument that represents a loan made by an investor to a borrower
(typically corporate or governmental).

•A mutual fund is a type of financial vehicle made up of a pool of money collected from many
investors to invest in securities like stocks, bonds, money market instruments, and other assets.

Difference between bond and stocks

➢ A bond is a loan given by an investor (typically the government or a company) to a

borrower (a form of investment given on a fixed interest rate) while a stock is a purchase
made that represents an ownership share in a company.

What is a Budget?

➢ A budget is a financial plan for a defined period, often one year. It may also include
planned sales volumes and revenues, resource quantities, costs and expenses, assets,
liabilities and cash flows.

What is the purpose of a Budget?

The purpose of a budget is to plan, organise, track, and improve your financial situation. In other
words, from controlling your spending to consistently saving and investing a portion of your
income, a budget helps you stay on course in pursuit of your long term financial goals.

What is Short Term Finance?

Short term finance refers to financing needs for a small period normally less than a year. This
type of financing is normally needed because of uneven flow of cash into the business, the
seasonal pattern of business, etc. In most cases, it is used to finance all types of inventory,
accounts receivables etc.

Types of Short Term Financing

1. Trade Credit - This when one purchases goods on credit. The supplier supplies goods on
credit.
2. Commercial Bank Loans - You get loans from the bank and it earns interest over time.
3. Promissory Note - These are signed documents that contain a written promise to pay a
stated sum to a specific person by a certain date.
4. Installment Credit - granted on the condition that it will be repaid at regular intervals.
5. Indigenous Credit - a group of people will jointly put money into a central pool of funds
and then take it in turns to access the pool.
6. Private Money Lenders - Private Money or Private Money Loans is a term used to
describe a loan that is given to an individual or company by a private organization or
even a wealthy individual. The organization or the individual is known as a private
money lender.
7. Advances From Customers - Advance from customer is a liability account, in which is
stored all payments from customers for goods or services that have not yet been
delivered.

OR

It is a type of payment made ahead of its normal schedule such as paying for a good or service
before you actually receive it. For example: For prepaid cell phones, service providers require
payment for cell services that will be used by the customer one month in advance.

8. Factoring - Factoring, receivables factoring or debtor financing, is when a company buys

a debt or invoice from another company, at a discount.
9. Venture Capitalist - this is where rich individuals are willing to invest in new business
enterprises.
 10. Crowdfunding - Crowdfunding is the use of small amounts of capital from a large
number of individuals to finance a new business venture.
11. Angel Investors - Wealthy individuals who provide funding for an existing company in
return for a share of the equity of the business.

What is Long-Term Finance?

Long term financing means financing by loan or borrowing for a term of more than one year by
way of issuing equity shares, by the form of debt financing, by long term loans, leases or bonds
and it is usually done for big projects financing and expansion of a company and such long term
financing is generally of high.

Types of Long Term Financing

1. Loan from government agencies - governments often seek to promote small business
because they provide jobs, sell exports and contribute to effective nation building.
2. Private sectors investment and loans

Forms of Savings

Outline forms of savings such as sou sou (partner), deposits in financial institutions - short-term
deposits, fixed deposits.

● Sou sou (partner) : A sou-sou is a group of people who pool their savings by making
regular contributions weekly, biweekly, monthly, to a fund which is then paid out to each
member of the group according to an agreed upon schedule.

NB: This is an informal form of savings.

● Deposits in financial institutions:

Deposit account - An account in which money is held for safekeeping by a bank or

financial institution.
 Saving account - This is an account where you can store money that you don't need
immediately and earn interest on your savings.

Short-term fixed deposit - This is essentially a sum of money you invest for a short
period of time, no longer than a year, at an agreed interest rate.

Fixed Deposits - This is a long-term, tax-free savings account, which offers a fixed
interest rate which is higher than a regular savings account, depending on how much you
save.

Endowment Policy - Savings (savings policy) with an insurance company that is tied to
your life insurance.

NB: These are all known as formal forms of savings.

Home Work

1. Identify personal sources of capital for setting up a business.

➢ Family and friends

➢ Loans (Credit Unions/Banks)
➢ Personal savings
➢ Government grants
➢ Equity - This is when owners contribute funds through buying shares into a new business
(owners equity).
➢ Venture capital - Usually done by wealthy persons who fund a business project.
➢ Crowdfunding - This is the contribution of lots of small sums of capital by a large
number of people to fund a venture and is done by online contributions. It is always done
in exchange for something, for example: credibility or promotions

Why Sole Traders Need To Keep Records/ Reasons Sole Traders Keep
Records

1. To determine whether the business is making a profit or loss.

 2. For tax records. (Calculating profits for tax authorities)
3. For lenders. Persons who would like to lend businesses money are always interested in
financial records to determine whether or not to actually lend money.
4. For accountability.

Forms of Bookkeeping

❖ Single Entry Bookkeeping - This involves making a single entry when a transaction is
made.
❖ Double Entry Bookkeeping - For every debit, there is a corresponding credit. It shows
the effects of any transaction made on the two accounts.

A business borrows $1000 from its bank to spend on a computer. This involves crediting its bank
account by $1000 and debiting the equipment account by $1000(equipment-computer).

What is a Financial Statement?

This is a statement that shows the profit and loss of a business. It shows the overall profitability
of a business.

The income statement, also called the profit and loss, is an example of a financial statement. As
the name suggests, it is used to calculate the profit and loss of a business over a twelve-month
period. The profit account shows the revenue and the expenses or cost

What is The Purpose of a Financial Statement?

➢ It is used to calculate profit and loss.

NB: Total Revenue - Total Cost = Profit

Revenue refers to income from sales. In layman’s terms, money that is made from sales.

➢ It shows purchases and sales.

➢ It shows how businesses control their cost or expenses.
➢ It can be used to attract investors.
 ➢ To acquire a loan.

What is a Balance Sheet/Statement of Financial Position?

This is made up of assets, liabilities and capital (owners equity).

NB: Assets = Liability + Capital

Assets are anything owned by the business. Eg: Machinery and equipment

Capital is anything that you use to start a business. Eg: Money, Assets

Liabilities are anything that the business owes. Eg: Loans, Creditors (these are persons who you
purchase goods from on credit, you owe them money for those goods.)

What is a Cash Flow Statement?

The cash flow refers to the transfer of cash in and out of a business over a period of time. It will
show you money coming into the business and leaving the business.

Cash inflow would speak to money received from the sale of something while cash outflow
represents paying your supplier, or paying wages, or paying bank loans.

Net Cash Flow is the difference between cash flowing into the business and cash flowing out of
the business.