Chapter 8 - Finance

PAST CASHFLOW FORECAST AND FINANCE QUESTIONS

2019 – TWO DISTINCT SITUATIONS REQUIRING SHORT‐ 2015 – EXPLAIN THE REASONS WHY A CASH FLOW 2015 – CCALCUALTE THE FIGURES (C) ii
TERM FINANCE AND EXPLAIN THE MOST APPROPRIATE FORECAST IS PREPARED (C) i A = (€10,000) Closing cash for previous period
SOURCE OF SHORT‐TERM FINANCE IN EACH SITUATION. 1. Acts as a financial control mechanism – when there will be a B = (€30,000) 90,000 -120,000)
1. Paying for stock. - Trade Credit shortfall in cash C = €20,000 opening cash for October
2. Paying for wages/first month’s rent/deposit - Bank Overdraft 2. Identify period when expenditure is higher than income
3. Utilities – Accrued expenses 3. Identify when there will be a surplus of income over
expenditure
4. help gain access to finance

2015 – DEAL WITH THE FINANCIAL PROBLEM IDENTIFIED 2009 – EXPLAIN THE REASONS WHY A CASH FLOW 2009 – IMPROVE THE POSITION OF A CASHFLOW
IN THIS CASH FLOW FORECAST. (C) iii FORECAST IS PREPARED (C) i FORECAST (C) ii
Avail of a short-term source of finance - arrange a bank overdraft 1. Identifying the timing and sources of cash inflows 1. Spread the purchase of Fixed Assets over a few months
facility 2. Identifying the timing and sources of cash outflows 2. Try to avail of a bank overdraft
Adjust receipts - changing its marketing mix, e.g. lowering price to 3. Establishing Net Inflows/Outflows – business can then plan 3. Have better credit control
sell more effectively to meet cash shortages 4. Control overhead – negotiate insurance or rent
Adjust payments - The business could decrease its cash payments 4. Provides a benchmark against which actual performance can be
by sourcing cheaper suppliers, restructuring loan repayments compared, aiding financial control
5. Access to finance from financial institutions

2007 – EXPLAIN THE REASONS WHY A CASH FLOW 2007 – DEAL WITH THE FINANCIAL ISSUE HIGHLIGHTED 2014 – OUTLINE THREE FACTORS THAT SARAH’S BANK
FORECAST IS PREPARED (B) i (B) ii MAY CONSIDER WHEN ASSESSING HER BANK LOAN
July: there is a Net Cash deficit of €10,000 APPLICATION (B)
1. Measure the expected liquidity for July to September How to improve the deficit? – 1. Creditworthiness:
2. Identify problem areas/periods 1. Increase Receipts, 2. Ability/capacity to repay the loan/Business Plan.
3. Plan for sources of finance 2. quicker collection of outstanding money from Debtors 3. Profitability/liquidity/gearing.
4. Compare with previous forecasts 3. Arrange a short-term source of finance, e.g. bank overdraft. 4. Amount /purpose of the loan/Time period for the loan
5. Good cash management. 5. Availability of Security:
6. Level of own investment/Grants etc

2014 – EXPLAIN THE TERM ‘SHORT-TERM FINANCE’. (C) i 2014 – OUTLINE TWO SOURCES OF SHORT TERM (C) ii 2012 – (ABQ) IDENTIFY AND DESCRIBE THE SOURCES OF
Short-term finance is finance available for a period of up to one 1. Bank Overdraft. FINANCE FOR (I) RIM LTD (II) INDIVIDUAL
year. It should be repaid within twelve months and should be used 2. Accrued Expenses STALLHOLDERS.
for short term needs. 3. Trade Credit RIM LTD STALLHOLDERS
4. Factoring Debts Mortgage Hire Purchase:
5. Invoice Discounting Equity Leasing
Grants Bank Overdraft
Medium Term Loan Accrued Expenses
Trade Credit
 Chapter 8 - Finance
PAST MANAGEMENT SKILLS QUESTIONS

2011 - EXPLAIN THE TERM ‘SHORT-TERM FINANCE (i) 2010 – DISCUSS THE FACTORS THAT SHOULD BE 2010 – ANALYSE TWO APPROPRIATE SOURCES OF
Short-term finance is finance that is available for a period of up CONSIDERED WHEN CHOOSING BETWEEN DIFFERENT FINANCE FOR ACQUIRING A DELIVERY VAN (C) ii
to one year. It should be repaid within twelve months. SOURCES OF FINANCE. (C) (i) A medium term
1. Cost 2. Purpose 1. loan is obtained for a period of one to five years.
ILLUSTRATE A BUSINESS SITUATION WHERE ‘SHORT- 3. Amount 4. Control 2. Interest must be paid but it is tax deductible.
TERM FINANCE’ WOULD BE APPROPRIATE. (ii) 5. Collateral 6. Risk 3. The loan is repaid in agreed instalments.
Trade credit could be used to purchase stock for resale. 4. The bank may require security

2010 – ANALYSE TWO APPROPRIATE SOURCES OF 2008 – IDENTIFY A SUITABLE SOURCE OF FINANCE FOR 2008 – GIVE TWO REASONS FOR YOUR CHOICE. (B)
FINANCE FOR ACQUIRING A DELIVERY VAN (C) ii THE PURCHASE OF A DELIVERY VAN (A) Hire-Purchase: a. No security is required. b. Easier to obtain
Leasing A Medium term sources of finance for the purchase of a delivery than other sources of finance. c. Same consumer rights as a cash
1. This involves renting rather than purchasing the asset. van require purchaser
2. The business will never get to own the asset.
3. Payments may be offset against tax. No security is required. Medium Term Loan: a. The interest on the loan is tax deductible
4. While it costs more than cash purchase it helps a businesses and large amounts of finance may be raised. b. May be flexibility
cash flow. in the amount and timing of payments/can be arranged to suit
. ability to pay

2006 – DEFINE SHORT-TERM FINANCE (A) 2006 – OUTLINE TWO SHORT-TERM FINANCE OPTIONS 2005 – DISCUSS, USING EXAMPLES, THE FACTORS A
Finance available for less than one year and used to finance short- (B) MANAGER SHOULD CONSIDER WHEN SELECTING
term assets such as stock. 1. Trade Creditors SOURCES OF FINANCE FOR EXPANSION.
2. Bank Overdraft Cost/Interest Control/BOD/Management
3. Accrued Expense Purpose/Mismatch Access/Availability
4. Factoring Risk/Gearing Security/Collateral
5. Invoice Discounting Profit/Taxation Credit Rating
 Chapter 8 - Finance
Cashflow

Key Words
Example of a simple cashflow forecast
Cashflow - is the difference between the money flowing in and out of a business or household
A cashflow forecast (Budget) - is a document showing the planned flows of money in and out of
a business or household over a certain period of time . It is used to predict the big income and
expenditure and when they are likely to occur for a business/household

Benefits of a cashflow statement

1. Assists Financial Planning – Cashflow forecast can act as an early warning system of possible
cash shortage and/or positive cashflow
2. Financial Control – By predicating cash shortages business and households can identify when
and where savings/cutbacks need to be made.
3. Loan Requirements – Cash flow forecast can be used by business to show how much loan
finance will be needed to keep the business afloat. This will reassure investors and banks
that the business will be well managed
Example of a simple cashflow forecast

Elements of an effective cashflow forecast

1. Is it Realistic – if in doubt predicted income should be underestimated and predicted
expenses should be overestimated? Reserve finance should be available in saving or loans
2. 2. Are there seasonal factors – Does the take into account the highs and lows in sales
(December V March)
3. Credit – The Cashflow statement should take into account possible delay in payment form
debtors and household when starting a new job and receiving their first pay slip
4. What about bad debts – These are debtors (people who owe the business money) who do not
pay their bills. This is money lost to the business
5. Are taxes included

Reading a cashflow forecast Reading a cashflow forecast

A (Income) This is any income received by the household and includes Wages, dividends, E (Closing Cash) This figure is got buy adding net cash figure and the opening cash figure (C +
social welfare payment or loans. It is the money coming into the household D) – The closing cash for the last month should be the same for the closing
(Income) cash for the total
B (Payments) This is any expenditure paid by the household and includes Mortgage, car Remember
loan/service, telephone bill, food, entertainment, It is the money going out of If there is a deficit (Minus figure) for a month – look back and see if there is a big payment for
the business (Expenditure) that month or the previous month. If there is, one way to prevent this is to spread the payments
C (Net Monthly) This is the difference between A and B. it is the money left over at the end for that item over a few months instead of paying it all in one month
of the month – A-B
D (Opening Cash) This is the money the household has at the start of the month, the closing
cash for one month is the opening cash for the next month. Remember the
same opening cash figure goes in Jan and Total
 Chapter 8 - Finance
Source of Finance

Short- term Source of finance Main source of Finance

Trade Credit Accrued Expenses Bank Overdraft Factoring Debt Invoice The sources of finance available to a business and a household are
Discounting Short term Should be repaid within one year
This is receiving goods This is also known as unpaid expenses. It These are short term This means This is when a Medium term Should be repaid within one to five years
now but paying for means delaying payment of bills and using banks loans giving the selling the right business gets a Long Term Does not need to be repaid for at least 5 years
them later the money to pay more urgent expenses current account holder to collect loan from a bank
The business can use Businesses and households can delay permission to withdraw payment from to the value of How should finance be selected
the money to pay bills paying bills (Gas, Electricity) until money gather than they your debtors to some percentage
The following criteria should be taken in consideration when selecting a
that are urgent. To absolutely necessary and use this money actually have in their a factoring of the amount
source of finance
receive prompt to pay other bills. Households have to be current account. The (Debt owed to the
payment suppliers careful that maximum amount of the collecting) firm business by its 1. Purpose - the source of finance should match the use for which it is
offer discounts to they do not delay too much else they may loan has to be agreed in customers needed
business and charge be cut off until the bills are paid advance with the bank 2. Amount – The source of finance should be able to provide the amount of
interest for late finance required
payments 3. Cost – Both should try to get the cheapest source of finance. APR (Annual
Medium - term Source of finance Percentage Rate) is a standard measure of the interest charged on loans.
Hire Purchase Leasing Term Loan Some source of finance are tax deductible
This allows a This means renting an item (Car) for an This is a loan from a 4. Control –
household or business agreed number of years. When the lease financial institution that is 5. Risk -
to buy an asset (car) is up the item is returned to the lessor repaid in monthly
What banks look for before giving a loan
by paying for it in installments over a number
instalments over a of years 1. Amount a purpose for the loan
period of time The conditions of the loan 2. Creditworthiness of the person
The asset can be used differs on the needs of 3. Ability to repay the loan
straight away but full the household or business 4. Collateral
ownership only passes (Duration, interest
when the item is paid charged, security
How current account assists business and households
for in full (last required0 1. Pay path system
instalment) 2. Chequebooks
3. Standing orders
Long - term Source of finance
4. Direct debts
Mortgage Savings/Retained earning Owners Capital/Equity State Grant Invoice Discounting
Business Business)
5. ATM cards
These are loans used Savings are a major source of This is finance brought This is a free gift of This is a contract to 6. Debit Cards
to finance the finance for a household (Banks. into a business by the money provided to a raise cash by selling a 7. Overdrafts
purchases of a house Credit unions, An Post) owner business to be used for piece of property and
or other property Deposit accounts pay savers This finance can be a specific purpose then leasing it back on
They are available interest on the money saved brought into the There are no interest a long-term lease
form a bank or The rate of interest will depend business through the or cash payments This provide the
building society on the amount saved and how entrepreneur’s personal involved business with a lump
A household/business long it has been left on deposit finance, selling shares But there are sum of money
will have to calculate Retained earnings (reserves) a or bringing in a new conditions that must be
the implication of the profit that have been retained partner met and if they are not
monthly repayments (put back into the business) to they money will have to
on their monthly cash allow the business to expand be paid back
flow before applying
for a mortgage