Chapter 13

Managing Finance

Cashflow Forecast

Cashflow- the difference between the money flowing in and the money flowing out of a business or household. Cashflow Forecast- A statement predicting in advance the size & the timing of income and expenditure to help them plan how to best manage their finances to ensure they live within their means.

Positive Cashflow- More money coming in than going out.Negative Cashflow- More money going out than coming in so the business needs to borrow

AdvantagesStart-up finance- Shows a new business how much they need to get the business up & running. Required by banks when seeking loansBorrowing- Acts as an early warning system of times of negative cashflow so the business can save to avoid borrowing or to arrange borrowing.Financial Control- Can be compared to actual cashflow statements to see how well they are controlling their cash flow.

Cashflow ForecastsRealistic- underestimate income & overestimate expenditure & keep buffer financeSeasonal factors- Does it take into account busy times- Christmas/ dips in sales?Credit- should take into account delays in payment from debtors- can we still meet our expenses Bad debts- Make a realistic provision for bad debts. Taxes- Cashflow is affected by PAYE, VAT etc which is collected by the business & sent onto the revenue commissioners

Current Account

Is a bank account which allows people to withdraw money with ATM card, cheque & a laser (debit card)Cheque- gives permission to another person to withdraw an amount of money from your current account. Little or no interestAccount fees

Standing Order

When the bank pays a FIXED amount out of your account to another account at the same time each week/ month/ yearEg. Rent

Direct Debit

When you authorise the bank to pay a bill of a variable amount for you directly out of your bank account. The timing may also varyEg. Electicity bill

Paypath

When the business pays its workers wages directly from their bank account into the bank account of their workers.

ATM Cards

Allow the account holder to withdraw cash from an ATM machine & also avail of other services such as see recent transactions, check account balance, pay bills etc

http://www.moneymatterstome.co.uk/Interactive-Workshops/ATM.htm

Laser Cards

Also called DEBIT cardsAllows the current account to be debited when the card is used in a store with pin no. (money taken directly from account when used to pay for goods)Cashback facility in many stores

Bank Statement

http://www.moneymatterstome.co.uk/4-Financial-records-and-information/Sub1/BankStatement.htm

Internet Banking

See

http://www.365onlinedemo.ie

Overdraft Facility

The bank may allow the customer to spend more money than is in their current account up to an agreed limit

Opening a bank accountPersonal CustomerName & address & proof (passporrt/ drivers licence & household bill)OccupationEmployer nameIncome/ salaryBusiness- name & address of business& proof & directors, nature of business, company documents (memorandum of asscociation), copy of final accounts

HouseholdIncomeSalaries, wages, social welfare, interestExpenditureRegular= foodIrregular= clothingDiscretionary= holidays

BusinessIncome profits, grants, revenue from investmentsExpenditureCurrent = wages, advertising, raw materialsCapital= fixed assets eg premises

Sources of Finance(Pg 204-05) Household Business

Short(under 1 year)

Accrued expenses, Bank overdraft, credit cards

Accrued expenses, Bank overdraft, trade creditors, factoring debts

Medium(1-3 years)

Hire PurchaseLeasingPerson al Loan

Hire PurchaseLeasingTerm Loan

Long(3+ years)

SavingsMortgage

Retained EarningsShare/equity capitalLong-term loans

Credit Purchases

Buying goods now & paying for them at the end of the month.

Accrued Expenses- putting off bills for as long as possible & using the money for another purpose. Eg. ESB bill

Credit Cards

Eg. Visa, MastercardBuy goods & services with the card up to an agreed limit. Bill arrives at the end of monthMust pay bill by due date or charged high interest. Charged nothing if pay on time.

Charge Card

Pay for goods using card & when bill arrives in the post you MUST pay it straight away. Does not offer credit.

Eg. American Express, Diners card

Medium Term Loan

From Bank, Building society or credit unionInterest chargedPay back amount borrowed & interest in monthly installments

Savings

Major source of finance for individualsEg save up to buy a new carDeposit accounts- pay interest on the amount saved depending on the amount saved & the length of time saved for & the notice needed to be given before withdrawals.

Characteristics of the ideal investment

Return - highRisk- lowConvenience- easy to withdraw in an emergency.Tax (DIRT)

Credit Union

Members have Common BondSavingsLoans to members in proportion to savings.

Long Term Loans

Mortgages- from building society & banksAnnuity- borrower pays back lump sum borrowed & interest in monthly installments. Endowment- interest only paid back during loan duration & amount borrowed paid back at the end of the loan. Taken out in conjunction with a life assurance

Choosing a Source of Finance

Amount requiredPurpose of financeCost (APR)ControlTiming of repayments

Similarities & Differences

Both prepare cashflow forecastsRaise finance to cover needsBudget & spend wiselyUse bank services eg. Cheques, standing orders..Complete similar formsBorrow when necessary

Cashflow greater in a businessBusinesses aim to make a profit, households work to improve living standardMore time spent in financial mgt by a businessBusinesses must legally keep accountsBusinesses borrow greater amounts than a household.