BUSINESS FINANCE

 Outline ways used by individuals to manage personal income:

Personal income is money received from salaries, wages’ bonuses received from employment and
self-employment; dividend received from investments; rent received and profit sharing from
businesses;

Ways to manage personal income are:

a) Making a budget- Look at your income and prioritize spending. This is a financial statement
showing projected revenues and projected spending. Note, the government also makes a
budget for the country in relation to the different sectors
b) Budgets allow individuals to:
- prioritize needs and wants
- keep track of spending
- allocate money towards savings and investment
- manage credit and create an emergency pool
Balanced Budget- Expected revenue = projected expenditure
Deficit budget- Expected revenue is less than projected expenditure
-
INCOME EXPENDITURE AMOUNT
Salary $100 000
Other sources 80 000
TOTAL INCOME 180 000
FIXED PAYMENTS
Taxes 10 000
mortgage 10 000
Insurance 5 000
VARIABLE PAYMENTS
Food 15 000
Gas 20 000
UNPLANNED EXPENSES
Entertainment 10 000
TOTAL EXPENSES 70 000
NET INCOME ( Income less 110 000
expenses)

 Savings – Save a portion of income every week or month

 Investment- Invest any bonuses, increases or a part of your income monthly
 Financial advising- Get a trained professional to advise you on how best to save / invest

 Differentiate between savings and investments

Savings and investments are key to achieve financial security
SAVINGS is income that is not used up for consumption. That is money placed in the bank or a
partner, credit unions or insurance. This is to meet short term needs. The risk is low and interest
earned is lower than investment’s. Persons save to buy a vehicle, send their children through college
or even to pay deposit on land or a house

INVESTMENT is money used to add to the capital of a business for further expansion (expansion
of factories, purchasing machinery, training and development buying shares bonds and securities).
This is long term. The risk varies from high to low based on what is invested in. The returns vary
based on the risk
 Forms of Savings:
(a) Sou sou (meeting-turn, partner, box hand)
 In the Caribbean partners are given different names based on the countries:
-Sousou- this is a French coin of low denomination and is also used to describe small amounts of
money. (Trinidad, Cayman)
Box Guyana Partner (Jamaica)
Sindicatos (Mexico, Colombia) Meeting turns– Barbados

(b) Deposits in financial institutions:

o Interest bearing deposit accounts - Money not needed for daily / regular
expenses is lodged in these accounts. There may be limits on the number of
withdrawal and so interest will accumulate

(c) Short term fixed deposits- money is lodged for a period of time and cannot be touched
for a few months to years. Interest rates are relatively higher than other accounts. Money can
only be withdrawn when the agreed term of deposit has been reached

Forms of investments as deferred income and investment as risk bearing:

(a) **stock market-

(b) Government securities: bonds, debentures-

Bonds are IOU issued by the government or companies. The bonds are sold to investors
when a government wants to borrow money. The bond will have a maturity date for the
government to repay the original cost of the bond to investors. However, the investor will
receive a steady stream of small payments over the period

Corporate bonds are issued by companies and may be secured or unsecured against some or
all their physical assets

(c) Mutual funds – This is a professionally managed investment fund that pools money from
many investors to purchase a wide range of different stocks or bonds
Types of short-term financing:
SHORT ADVANTAGES DISADVANTAGES
TERM
FINANCING
Trade credit A credit facility arrangement between two firms. E.g. a Companies can negotiate longer payment period New startup companies or those with poor
manufacturer and a retailer that allows the retailer a This is technically borrowing money from the credit history will not get trade credit
period of time to settle the debt suppliers
Commercial
bank loans
Promissory A signed document containing a promise to pay a Are used by companies to raise finance from Legally there are issue as the note has no
notes particular amount of money to a specific person at a other areas but not thee bank provision as what action to take if the borrower
specified date They can be relatively informal but still legally fails to pay back the money as agreed
binding
Instalment Credit for a fixed sum to be paid over time with a fixed Buyers own the item and pay monthly Interest rates are high
credit number of regular payments. These are used to installments The total interest might add up while the value
purchase cars and machinery Buyers pay from future income of the item has fallen
Indigenous A group of individuals, normally individuals from a Credit is available to those without credit historyUnregulated
credit community agree to save and borrow together and those not able to get a loan from the bank Associations are built on trues and loyalty
If disagreements arise, it is hard to get redress
legally
Private money Private money lent by an individual or company to Private money lenders are willing to lend to those Private money lenders must comply with
lenders another individual or company who commercial banks consider risky lending laws but interest rates tend to be high.
In cases of non- payment, collection methods
are very aggressive
Advances from Customers pay for goods/ services before receiving it This is used in the airline or when customers buy This is only successful if competitors require
customers gift cards from stores this also

Factoring A financial arrangement in which a factoring company The customer issuing the invoice can get pay The factoring company has to be paid for its
collects invoice payments on behalf of another company immediately instead of waiting weeks for service and this means higher costs, Customers
payment may see this as placing their debts in the hands
of a third party
venture Investors who provide capital startup ventures Apart from capital, entrepreneurs can get Based on the size of the capital of the venture
capitalists valuable sources of experience and guidance capitalists, the ownership and control could be
from those with the experience lost
Crowd funding The use of small amounts of capital from a large A fast way to get funding and provides a valuable This is new and has been largely confined to
number of individuals to finance a new business way to market your business. This can attract developed markets for internet based
venture (Use of the internet) expert feedback and guidance once ideas are companies
shared
Angel investors Private investors who finance business in the early Less risky than loans from the banks. If the Angel investors can be very difficult to find The
stages of survival. This is done for an ownership stake. business fails, the capital may not have to be owners might have to give up a part of their
The may be a friend or family member repaid business

Types of long-term financing:

LONG TERM ADVANTAGES DISADVANTAGES
FINANCING
Loans from government Grants are non-repayable. government loans Government grants are free Applying for a grant or loan can be a
agencies need to be repaid but interest rate is low or none Government loans interest rates are lower than complex and time consuming process
the market rate

Debentures A long term loan taken by the firm, This is Long term loan the company an obtain by issuing The rate of interest set by the company is
issued at a fixed rate of interest its own debt at a fixed rate of interest based on its reputation or credit-worthiness.
Issued by a company or government to borrow That is high risk companies will have to set
money high interest rates to attract investors

Shares Shares are issued for start up capital Investors do not have to pay back money but get a Only limited companies can sell shares. The
return on their investments more shares sold is the more control of the
company is diluted for the original share
holders
**Insurance

**Investment
**Unit trusts

**Mortgages
 Identify personal sources of capital for setting up of a business:
 Friends and family

 Personal savings- includes life insurance policies as the owner can borrow against the
cash value of the policy
Family savings
Life insurance policies
Property or vehicle

 Home equity loan where the property is used as a collateral

 Government grants- money from the government, or member of parliament which does
not need to be paid back

 Loans- loans from commercial banks backed by collateral

 Equity- shareholders are allowed to buy shares in the business

 Venture capital- funding from individuals and firms that finance or invest in startup
business. They want a return on their money

 Crowd funding.- the use of small amounts of capital from a large number of individuals
to finance a new business venture

Identify the purposes of basic financial records for sole traders.

Recordkeeping in business is keeping business records in an orderly and disciplined manner. Sole
traders can keep track of the business, plan for the future meet legal compliance and tax
preparations
(a) Identify types of bookkeeping systems
Single entry- recording transactions as deposits and payments made into the business
account. Suited for business with low volume of transactions

Double entry. - Used in businesses of any size. Two entries are made for each
transaction. That is a change in total assets must equal to a change in total equity
(A =L + Owners equity)

(b) Explain the purpose of basic financial statements:

STATEMENT PURPOSE
INCOME STATEMENT  Shows the expenses and revenues of the venture
(PROFIT AND LOSS)
 Used to calculate the profit and loss

 Shows the financial performance of the venture for the

year
STATEMENT OF FINANCIAL  Shows total assets, liabilities and equity of the business
POSITION at a specific date

 Facilitates decision making and provides information on

the financial position of the business

 Provides information on the ability to meets its debts

and other obligations
STATEMENT OF CASH  Summary of all cash transactions during the period
FLOW.
 Shows the source of all cash inflows and how all
outflows are spent
