Business Finance Pt 3

Savings and Investments

Task 3: Differentiate between the terms savings and investments.

Forms of saving Meaning

Sou Sou Is a rotating savings club where a group of people

(sometimes called partners) co-operate by
contributing an equal amount

Credit union
The credit union movement is also a co-operative
system that is intended to help people requiring
saving facilities. They aim to encourage thrift.
They offer a basic bank account, often with a
debit, not credit cards or a cheque system.

Deposits in financial institution Many registered and regulated financial

institutions provide basic savings accounts where
money can be kept safe and earn a modest amount
of interest to savers.

Short-term fixed deposits

Short-term fixed deposits are a method of saving
whereby an amount of money is placed with a
financial institution for a fixed term, for example
for one year. If the sum deposited is withdrawn, a
penalty is imposed. The amount deposited is the
short-term fixed deposit.

Forms of investment Meaning

Deferred income Investing is considered ‘deferred income’. Unlike

a bank account, where access to the reward for
lending your money (saving) is assured and
immediate,the reward for investing is delayed
(deferred) and uncertain.

Risk-bearing Investment risk refers to the possibility or

likelihood of losses from an investment

venture. Risk is a feature of many forms of

investment. The degree of risk varies depending
on where the investment is placed, but the degree
of return also varies.
Stock market
The stock market is also known as the equities
market. This is because it is involved in the sale of
equities, that is , shares (stock) in a business. In
buying equities, the purchaser is taking ownership
of a small part of a particular company. Equity is
sold in the form of shares.

Government securities, bonds, debentures Meaning

Government securities
A government security is a bond issued by the
government with a promise of repayment upon the
security’s maturity date. They are generally long-
term securities with the highest market ratings and
are one of the safest forms of investment, hence
they are often referred to as gilts.

Bonds
These are also issued by businesses (corporate
bonds) as a means of borrowing long-term funds.
They also promise to pay back the loan on
maturity. Bonds are purchased by individuals,
commercial banks and institutional investors such
as pension funds, who hold them as a form of
portfolio investment (a grouping of a variety of
types of investment).

Debentures A debenture is a debt security issued by the

government (and also limited companies) to raise
money that is not secured by specific assets but
rather by the general credit worthiness of the
issuer. Obviously, the government is considered
very credit worthy.

Mutual funds
A mutual fund is made up of a pool of funds
collected from many money investors, for the
purpose of investing in securities such as bonds,
stocks and other money market instruments.

​Short-term and Long-term Financing

Short Term Financing -​Is finance that is obtained for a term of one year or less. Often a business
needs short-term financing to use as working capital. Working capital is the money that a business
needs for day-to-day operations of the business.
Types of Short-term:
● Trade credit - This refers to the process of providing business customers with time (a deferred
payment) to arrange payment for goods they have received. This period generally consists of
interest-free credit, which helps the receiver of the goods to achieve cash flow at the expense
of the supplier’s cash flow.
● Commercial bank loan - All commercial banks offer an overdraft facility. This is a form of
short-term finance provided for businesses. Even a well-managed business may have to deal
with an unexpected expense that may entail finding extra short-term funds at short notice.
● Promissory notes - ​ is basically putting the terms of a loan in writing, including how and​
when the money will be paid back.

Other types of short term financing: instalment credit (hire purchase), ingenious credit or private
money lenders, advances from customers, venture capitalist and Crowdfunding.
‘Read up’

Long-term financing - Loans and financial obligations lasting more than one year.​
Governments offer support to businesses. This support tends to take three forms: grants, loans and
equity investments. These may include:
❖ Government grants - A government-sponsored grant can provide a much-needed boost to
working capital and an opportunity for business growth.
❖ Government loans
❖ Government equity investment

Private Long-term financing

These may include - mortgages, debentures, shares, insurance companies, capital investment and unit
trusts.

Personal sources of capital for setting up of a business

1. Personal sources such as; savings are an obvious source of start-up capital. These are​
important not just because they provide a resource, but also because they demonstrate that the
entrepreneur is not just relying on others to take the risk of financing their venture.
2. Borrowing from friends and family is a common way to raise startup capital.​ Obviously,
this can be much cheaper than borrowing from the bank. However, there is a stress factor to
consider since family and friends are hurt as well as the entrepreneur if the business runs into
difficulty or fails.
3. Credit cards are sometimes used by startup entrepreneurs. For example, each month​ the
entrepreneur uses a credit card to purchase business resources that are used, and may be sold,
and at the end of the month the card company is paid back.
 4. Banks, as you know, offer a small businesses loan, but you need a sound business​
plan. These funds are loans, so the entrepreneur must generate enough income to cover the
loan repayment schedule, as well as interest charges.
5. Crowdfinancing, often encouraged by existing enterprises, are worldwide campaigns to​
help entrepreneurs raise funds for their business (or social activist project) by pooling the
small contribution of funds from many people to make something larger happen.
6. Angel Investors specialize in investing in early-stage or startup companies in exchange​ for
Equity ownership interest. Basically, angel investors group together the funds of many (often
relatively small investors), and invest in a group of start-ups, thus spreading the risk.

Financial records for sole traders

Purpose of basic financial records

The purpose of basic financial records is to provide owner(s) with information about the financial
position of the company and changes in the financial position of the Enterprise. This is important
because it helps the owner (s) to make economic decisions.

Bookkeeping & Accounting

Bookkeeping in the context of business activities is simply the recording of financial transactions.
These transactions include purchases, sales, receipt and payments. Bookkeeping is just one part of the
accounting process. There are some common methods of bookkeeping such as the single -entry
bookkeeping system and the double-entry bookkeeping system. Single-entry bookkeeping is a
simple system of recording information in which transactions​ are recorded only once, not twice as
a double-entry bookkeeping system. The single-entry system is used primarily in very simple
applications such as keeping record of check book balances.
The Books of Prime-entry​ are books, or computer records, in which certain types of​
transactions are first entered before becoming part of the double-entry bookkeeping system. These
include; the journal, the sales journal, the purchases journal, the purchases returns journal, the sales
return day book, cash book, and petty cash book.

Double Entry bookkeeping -​ for every transaction that occurs in business, something is received
(such as goods) and something is parted with (such as money). For every transaction there are two
entries in the account, one shows what the business has received and the other shows clearly what the
business has been parted with (payment).

Financial Statements

● Income Statements -​An income statement is a report that shows how much revenue a​
company earned over a specific time period (usually for a year or some portion of a year). An
income statement also shows the costs and expenses associated with earning that revenue. The
 literal “bottom line” of the statement usually shows the company’s net earnings or losses. This
tells you how much the company earned or lost over the period.

● Balance Sheets - A balance sheet provides detailed information about a company’s​

assets, liabilities and shareholders’ equity.
● Cash Flow Statement​ - is a financial statement that provides aggregate data regarding al​
l cash inflows a company receives from its ongoing operations and external investment
sources. It also includes all cash outflows that pay for business activities and investments
during a given period.

CXC Practice Question:

Paper 2011 Question 3
1. Define the term savings.
2. List TWO methods of saving that are available to individuals.
3. Identify TWO sources of short-term financing and TWO sources of long term financing.
4. Explain the role of the Central Bank as:
An advisor to the government
A lender of last resort
5. Identify TWO types of monetary transactions that can be conducted within the banking
system without the use of cash. Discuss how EACH transaction is performed.