Finance

Unit 4
Cash Flow Forecast
A financial plan that shows the business how much money it expects to
receive (receipts) and spend (payments) over a specific period of time.
It can have 3 different outcomes:
1. A cash surplus
2. A cash deficit
More cash
3. A balanced cash flow
coming into More cash
the business going out of The same
than going the business amount of cash
out. than coming coming in and
in. going out.
Purpose of a Cash Flow Forecast
Identifying periods of cash
surpluses and plan their use

Identifying periods of cash deficits

& take corrective action

Applying for finance – will be shown

to lenders/investors

Financial control – check if you’re

on target, and if not, take actions
How to Deal with a Cash Flow Deficit
1. Increase selling price – but not
reduce sales
If a business has
2. Reduce selling price – to continuous cash
increase sales flow deficits they
may have a
3. Discounts for debtors if they pay liquidity problem
early i.e. difficulty
paying bills as
4. Finance e.g. bank overdraft they fall due

5. Adjust payments e.g. cheaper

supplier, cut wages etc
Household Budgets
Expenditure in Household Budgets
Expenditure Explanation Examples

Fixed The amount stays the same • Mortgage

regardless of usage • Car tax
• TV licence
Irregular The amount varies based on • Petrol
usage • Electricity
• Groceries
Discretionary Expenditure on non-essential • Entertainment
items • Presents
• Holidays
Reasons for Preparing a Household Budget
Identify cash surplus – this can be
invested/saved and earn interest

Identify cash deficit – the household

an organise finance to deal with the
deficit e.g. loan

Apply for loans – can show banks

that you’re capable of paying back a
loan
Dealing with a Surplus and Deficit: Household
Surplus
• Make mortgage repayment and
reduce amount owed
• Save & earn interest in a deposit
account
• Put it away as savings for the
future
• Buy goods/services you’ve
needed/wanted e.g. extension,
holiday, new boiler
Deficit
• Spread payments over a longer
time e.g. pay car tax quarterly
rather than yearly
• Postpone expenditure e.g.
holidays
• Shop around for cheaper
suppliers e.g. insurance,
electricity etc.
• Reduce expenditure e.g. quit
memberships
Sources of Finance

Short Medium Long

Repaid within 1 Repaid between Longer than 5

year 1 and 5 years years to repay
Short Term Sources of Finance
Bank allow customer to withdraw more money
Bank Overdraft from their account than they have in it.

Advantages:
• No security needed to obtain one
• Fast application and approval process
Disadvantages:
• High interest rates e.g. 8-14%
• Can damage your credit rating if not repaid on time
Short Term Sources of Finance
The credit card firm pays the store or supplier and the
Credit Card customer repays the credit card company within an
agreed time frame.

Advantages:
• No interest charged if paid on time
• Accepted worldwide
Disadvantages:
• Temptation to overspend
• High interest rate e.g. 14-20%
Short Term Sources of Finance
This is when a supplier of services allows the
Accrued expenses business or household to use their service and pay
later.

Advantages:
• Free
• Improves cash flow
Disadvantages:
• Limited availability – only offered by some service providers
• Loss is discounts if not paid on time
Short Term Sources of Finance
This is when a business sells its sales invoices
Factoring (debtors) to a factoring firm (debt-collection
business) at a discounted price.

Advantages:
• No security needed
• No loss of control of the company
Disadvantages:
• High fees charged
• Business relationship with customers may be damaged
Short Term Sources of Finance
This is when a business receives goods or services
Trade Credit from its suppliers and pays by an agreed date in the
future.

Advantages:
• The business can use the goods immediately
• No interest charged if bills are paid on time
Disadvantages:
• May damage your credit rating if you don’t pay on time
• Not offered by all suppliers
Short Term Sources of Finance
Medium Term Sources of Finance
• The purchaser can enter into a hire purchase agreement
Hire Purchase to enable them to buy the item and pay for it in
instalments e.g. car/equipment

Advantages:
• Buyer gets immediate use of the product
• Quick and easy to arrange
Disadvantages:
• Risk of repossession if you do not pay as agreed
• High interest rate makes it expensive
• Buyer doesn’t own the item until last payment made
Medium Term Sources of Finance
• The borrower takes out a loan from a financial
Medium-term/Personal institution and repays it, with interest, at regular
Loan intervals over a period of 1- 5 years

Advantages:
• Generally no security required
• No loss of control for businesses
Disadvantages:
• For larger loans, security is needed and there is a risk of repossession
• Interest rate may increase, increasing repayment amounts
Medium Term Sources of Finance
Medium-term/Personal • The lessee makes regular payments to the lessor
Renting/Leasing for an agreed period of time while they are using
Loan
the asset e.g. premises/vehicles

Advantages:
• Access to up-to-date items such as technology e.g. computers
• Immediate use of the items
Disadvantages:
• The lessee will never own the item
• Can work out more expensive that buying the item if you lease it for a
long time
• Risk of repossession if payments aren’t made
Medium Term Sources of Finance

https://www.youtube.com/watch?v=WLlR-rLlEkg: From 22min 30sec

Long Term Sources of Finance
This is a long-term loan used to purchase
Mortgage property, repaid between 20-35 years

Advantages:
• A large amount of money can be borrowed
• Long repayment period
Disadvantages:
• High overall costs, can be almost double cost of the property
• Risk of repossession if repayments aren’t met

https://www.youtube.com/watch?v=l74083zafAM
https://www.youtube.com/watch?v=7yTbPKaqRag
Long Term Sources of Finance
This refers to cash that a household has not spent
Savings but saved for a future purpose.

Advantages:
• No financial costs
• No application process
Disadvantages:
• Can take a long time to save
• Must be disciplined to save on a regular basis
Long Term Sources of Finance
These are profits that a business has saved over
Retained Earnings time. It can then be reinvested back into the
business e.g. upgrade equipment

Advantages:
• No financial costs
• A large amount of finance available if the business is profitable
Disadvantages:
• Only available once – when it’s spent, it’s spent
• Can take a long time to save up
Long Term Sources of Finance
The business owners sell shares in the business to
Equity Capital investors. They then become shareholders and
have a say in the run of the business.

Advantages:
• No financial cost as no money is borrowed
• No security – owners invest money at their own risk
Disadvantages:
• Loss of control – shareholders get some control
• Shareholder disputes can happen and damage the business
reputation
Long Term Sources of Finance
A sum of money given to a business by a
Grants government agency used to fund expansion. It
does not have to be repaid.

Advantages:
• Large amounts can be available
• Grants don’t have to be repaid once terms and conditions are met
Disadvantages:
• Have to be used for the reason the money was received
• The grant may only be enough for some of the cost involved
Long Term Sources of Finance
This is long-term debt finance similar to a loan.
Debenture Interest only repayments made and amount
borrowed is repaid in one lump sum at a future date

Advantages:
• Fixed interest rate – know how much to be repaid each month
• May be able to borrow large amounts of finance
Disadvantages:
• Assets used as security can be repossessed if payments aren’t met
• There’s a cost to this source of finance as interest has to be paid
Long Term Sources of Finance
• This is when a business sells an asset and then
Sale and Leaseback leases it back from the buyer e.g. premises.

Advantages:
• Business can operate as normal while getting extra finance through
selling the asset
• Large amounts of money can be raised quickly
Disadvantages:
• A one-off source of finance – can’t be done over and over
• May take time to find a buyer and agree prices etc.
Long Term Sources of Finance
Venture capital firms invest money (capital) into
Venture Capital new businesses where there is potential for a
high return on their investment.

Advantages:
• Venture capitalists can bring expertise to the business
• May bring large amounts of finance to the business
Disadvantages:
• Loss of control as a share of the business is given to the venture
capital firm
• Profits have to be shared with the venture capitalist
Long Term Sources of Finance
 Factors to Consider When Choosing a Source
of Finance
Purpose of
•
finance
i.e. source of finance should match time frame of item being bought

•
Security Might have to give an item as collateral and may lose it if repayments aren’t made
required

Tax • Some sources of finance are tax deductible e.g. interest on medium term loan
implications

Cost• Businesses and households should choose the cheapest option available

•
Control Some sources of finance will dilute the control businesses have e.g. equity finance
•
 Loan Criteria
Financial institutions must consider many factors before deciding to
give a household/business finance
Borrower pledges an asset as security against the loan,
Collateral reducing the risk for lender against non payment. The asset can be
seized
Lender wants to ensure the person/business has a good
Character repayment reputation. Some are less risky e.g. permanent job
Households & businesses must show evidence of their ability to repay
Capacity e.g evidence of income/projected sales

Credit- Lender checks the borrower’s credit history e.g. trade reference,
worthiness Stubbs Gazette
Banking
There are 2 main types of bank accounts:
1) Current Account: for day to day banking, paying bills etc.
2) Deposit Account: for savings

Current Account Services

Standing Direct Credit Bank

Cheque
order debit transfer overdraft

Debit Credit Phone

Paypath
card card payments
Type of Service Service Explanation
Standing order (SO) Account holder gives bank instruction to pay a fixed amount on
a regular basis to an individual/organisation e.g. mortgage
repayment or gym membership
Direct Debit (DD) Account holder gives bank instruction to pay a variable amount
on a regular basis to an individual/organisation e.g. electricity
bill
Money Transmission Credit Transfer (CT) Money transferred between different people’s accounts either
online or in the bank
Cheque Written instruction to a bank to pay a set amount to the payee
(named person)
Bank Overdraft An agreement that customers can withdraw more from their
accounts than they have up to an agreed limit
Paypath Wages paid electronically into an employees account via payroll
Plastic Cards Debit Card Used to pay for good and services instead of cash. Amount
automatically transferred from user’s account to the businesses
account.
Credit Card Credit card firm pays the store or supplier and the customer
repays the credit card firm within an agreed amount of time
Other Payments Phone Payments Credit/debit card payments made using smartphone apps e.g.
Bank Statements
A document sent by the bank to it’s
customers on a regular basis, showing
all transactions over a period of time
e.g. 6 months

Other abbreviations:
ATM: automated teller machine
PIN: personal identification number
Common exam question!
Managing a Business v Managing a House
Similarities
• Cash flow forecasts and household budgets help
Financial planning businesses & households plan future income and
expenditure. Also highlight surplus and deficits

• Up-to-date and accurate financial records must be

Record-keeping maintained to monitor finances and keep tax affairs in
order.

• Businesses and households use common short, medium

Sources of finance and long-term sources of finance.

• Businesses and households use services offered by

Bank Accounts financial institutions on current accounts e.g. electronic
money transfers
Managing a Business v Managing a House
Differences
• Financial projections are more detailed for a
Financial planning business than for a household.

• Businesses tend to borrow larger amounts of

Amount borrowed money than households and are therefore exposed
to higher risks.

• Businesses can claim the costs of finance against

Taxes their profit, thus reducing their tax bill.

• There are more sources of finance available to

Sources of finance businesses than to households e.g. debentures
Key Terms
• cash flow forecast • long-term sources of finance
• household budget • mortgage
• deficit • savings
• surplus • retained earnings
• short-term sources of finance • equity capital
• bank overdraft • grants
• credit card • debenture
• accrued expenses • sale and leaseback
• factoring • venture capital
• trade credit • collateral/security
• creditworthiness • current account
• medium-term sources of finance • deposit account
• hire purchase • standing order
• medium-term loan • direct debit
• personal loan • bank statement
• leasing/renting • cheque
Exam Questions: Ordinary Level
2019

2018
Exam Questions: Ordinary Level
2017

2016

2014
Exam Questions: Higher Level
2010

2001