PRINCIPLES OF BUSINESS

SECTION 8 – BUSINESS FINANCE

NB. Read the related chapter(s) of textbook(s) for additional context.

OBJECTIVES

i. identify various financial institutions;

ii. describe the functions and services offered by financial institutions

iii. describe the role and functions of financial regulatory bodies

iv. describe the relationship between financial institutions and regulatory bodies

v. outline ways used by individuals to manage personal income

vi. differentiate between savings and investments

vii. explain the concepts of short-term and long-term financing

viii. identify personal sources of capital for setting up of a business

ix. identify the purposes of basic financial records for sole traders

BUSINESS FINANCE
9.1 VARIOUS FINANCIAL INSTITUTIONS
▪ A financial institution is a business/company engaged in or deals with monetary
transactions such as dealing with deposits, loans, currency exchange and investments.
Examples include:
(i) Central bank
(ii) Commercial banks
(iii) Non- Bank Financial institutions
- Credit unions
- Insurance companies
- Building societies
(iv)Micro-lending agencies
(v) Government agencies
(Give an example of each)

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9.1 FUNCTIONS AND SERVICES OFFERED BY FINANCIAL INSTITUTIONS

Functions offered by financial services

▪ Provide loans of varied amounts – this can be used for various purposes such as buying a
car, furniture, a house etc.

▪ Accepting savings and deposits from the customer – this will provide safe keeping of the
customer’s money.

▪ Process payments made and received by customers – via face to face, internet banking
and telegraphic transfers.

▪ They offer investment services and safekeeping of documents and other items in safety
deposit boxes

Services offered by financial institutions

▪ Night safe deposits– this is a deposit slot located on the outside of a bank, allowing
money to be deposited in the bank’s safe when the bank is closed. They can be accessed
with keys, pin numbers or some other security passes.

▪ On-line banking – this is a method of banking that enables a customer to conduct a range
of financial transactions electronically using the internet.

▪ Advisory service- such as advice on pension plans and long- term investment plans. This
advice will help the customer to make informed decisions concerning investments.

▪ They offer debit card and credit card [plastic money]

✔ Debit cards transfer money immediately from the customer’s bank account into
the shop’s bank.

✔ Credit cards allow purchases to be made even if the customer does not have
enough money in their bank account. The credit will have to be paid over the
next few months often at a high interest rate.

▪ Trustee work – the trustee is legally bound to manage the property or assets for the
benefit of a third party or beneficiary, they have to make decisions in the best interest of
the beneficiary.

▪ Deposit boxes- these are fireproof metal strongboxes that are usually in the bank for
storing valuables.

▪ ATM/ABM services- an automatic teller machine (ATM) is an electronic banking outlet

that allows customers to carry out basic transactions without a teller. It uses a credit card
or debit card.

▪ E-trade- is sometimes called electronic or paperless trade, this is a method of trading

securities (e.g. stocks/share and bonds) electronically. Electronic trading is quickly
replacing human trading in global security markets.

▪ Settlement service – this includes any service provided in connection to real estate as well
as other services such as; services offered by real estate agents or brokers or by taking out
a loan application and processing.

▪ Remittance service – refers to the sum of money sent generally to someplace abroad by
any method e.g. wire transfer, online transfer, by mail or using a debit card or credit card.

9.2 ROLE AND FUNCTIONS OF FINANCIAL REGULATORY BODIES

Financial regulatory bodies are government organizations such as include:

i. The Central Bank

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 ii. The Jamaica Deposit Insurance Company (JDIC)

iii. The Financial Services Commission (FSC)

Role of Regulatory Bodies

● The role of regulatory bodies is to monitor, control and guide various industry
sectors in order to protect consumers.
Functions of Regulatory Bodies
● The functions of regulatory bodies are; enforcing regulations and licenses of
various financial activities, depository, lending, collection and money
transmission activities.

9.3 RELATIONSHIP BETWEEN FINANCIAL INSTITUTIONS AND REGULATORY

BODIES

(a) Central Banks

▪ The Central Bank- is a government owned organization responsible for regulating
all the currencies supplied and related monetary policies for a country while. It is
the regulator/supervisor of commercial banks.

▪ Commercial banks are banks that offer banking service to the general public and
to companies
Ways in Which a Central Bank May Regulate Commercial Banks/the Economy
(i) Vary liquid assets ratio
.
▪ Liquid assets are assets that can be converted into cash easily in order for the
banks to ensure that they can meet the demands of their customers.

▪ Commercial banks are required to have the prescribed liquid assets such as cash
reserves, notes, coins etc. as sometimes they have insufficient cash and may
require assistance from the central bank due to inadequate cash or a lack of
liquidity or both. This is referred to as lender of last resort by the central bank.

(ii) Vary or adjust bank rates

▪ A bank rate is the interest rate at which the central bank lends money to
commercial banks often in the form of short- term loans.
▪ Lowering the bank rates or making it higher are methods in which central
banks manage the economy.

(iii) Change the minimum reserve requirement

▪ Commercial banks are required to maintain a minimum cash reserve to be
held with the Bank of Jamaica – the central bank.

(b) Financial Services Commission (FSC)

FSC oversees the regulation of Jamaica’s insurance, pension and securities industries.
Protection of the interests of policyholders is the primary
consideration for the Financial Services Commission (FSC) in its role
as supervisor and regulator for the insurance industry. Monitoring
both local and foreign companies offering life, health and general
insurance products, and the activities of:

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  Brokers
 Agents
 Sales Representatives
 Insurance Consultants and Loss Adjusters and the services
they provide.

Supervisor of Insurance

Under the Insurance Act of 2001 and Insurance Regulations 2001 the FSC is responsible for the
supervision of insurance companies in Jamaica.

9.4 WAYS IN WHICH INDIVIDUALS MANAGE PERSONAL INCOME

(a) Budgeting
▪ Budgeting means making a financial plan, it means planning what you pay
out in relation to what you earn.
▪ Having a personal budget ensures that a person does not spend more than
his income over a period of time and helps you to plan for the future.
▪ A budget enables us to cut out unnecessary expenses, save or stop having
large debts.

(b) Savings
▪ Saving is that part of income that is not spent, if deposited it can earn
interest.
▪ It allows an individual and a firm to buy goods in the future that are too
expensive now.
▪ It allows a person to survive if they lose their job until they can find another
job.
(c ) Investments
▪ Investment is spending by a business over a given period on the production of
capital goods e.g. machinery and raw material. There is also port folio
investment where individuals buy shares in business that they consider to be
profitable to make a return on their investment.
▪ For a company, investment means the purchase of capital equipment e.g.
machinery or additions to capital stock.
▪ For an individual, investment means buying shares in a company or
putting money in the bank.

(d) Financial advising

● An individual can access financial advice from financial institutions on
pension plans and long- term investment, this advice will help the
customer make the most appropriate decision.

9.5 DIFFERENCES BETWEEN SAVINGS AND INVESTMENT

Saving you are putting money away to keep and use later. Investing you are putting money
in, hoping that it will increase.

Forms of Savings

(a) SouSou
▪ SouSou [also known as partner/box hand/meeting turn] is where a group of
people each pool an equal amount of money for a period of time and after the
time is up, one person in the group receives all the money.

(b) Deposits in financial institutions

▪ Savings is where a customer makes a deposit and earns interest. The customer
has easy access to their money as withdrawals can be made from the ATM.

(c) Short term fixed deposits

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 ▪ This is a form of savings account where money cannot be withdrawn for a
certain period e.g. six months. Interest rates are higher than those earned on
savings accounts.

Forms of Investments

(a) Stock market/stock exchange

▪ This is a market where a company’s shares [also called stocks] are bought and
sold on the stock exchange. This can be done through a broker or may be done
online.

(b) Government securities (bonds and debentures)

▪ A bond is where the government borrows money and promises to repay the
lender at a fixed rate of interest at a specified time.
▪ A debenture is where a company borrows money on a medium or short- term
basis and promises to pay back the lender at a fixed rate of interest.

(c) Mutual funds

▪ Mutual fund companies collect a pool of funds from many investors (members of
the public) and use that money to buy other securities such as stocks, bonds and
other assets.

9.6 SHORT -TERM AND LONG-TERM FINANCING

Short- Term Financing

i. Trade credits – request your suppliers to give you a grace period within which to
pay for the goods they deliver to you.

ii. Commercial bank loans – banks provide short term loans and bank overdrafts.

iii. Promissory Notes - this is a signed document containing a written promise to pay
a stated sum of money to a person at a particular date.

iv. Instalment credit – is a means by which most durable products are bought. The
customer is allowed credit for a fixed sum to be repaid in instalments e.g. hire
purchase agreements.

v. Indigenous credit (private money lenders)- this refers to borrowing money from
an individual or group of investors, this loan is not a bank loan.

vi. Advances from customers- refers to money collected by a company before

providing product or service.

vii. Factoring- is a financing method in which a business owner sells its invoice at a
discount to a third party in order to meet its immediate cash needs.

viii. Venture capitalist - this is where wealthy investors invest their capital in a
company that is just starting and shows potential for growth. The returns to
venture capitalists depend upon the growth of the company.

ix. Crowdfunding – is a way of raising finance by asking a large number of persons

for a small amount for a project or a venture. Those seeking funds also use friends
and social media. E.g. Jamaican bobsled team used crowdfunding to raise US
$129, 687.18 in January 2014 to offset their expenses for the Winter Olympics.

x. Angel investors – is where an investor is usually a family member or friend who

provides a one-time investment to help a business in its early stage. They may
also provide an on-going injection of money to support a business through its
difficulty in its early stage

Long Term Financing

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 (i) Loans from government agencies such as;
▪ Development Bank of Jamaica Ltd provides loans for agricultural enterprise
manufacturing and tourism.
▪ The Jamaica Social Investment Fund (JSIF) provides funds to scale community-
based projects.
(ii) Mortgages- pledging an asset in order to get a loan from the bank
(iii) Debentures- A debenture is where a company borrows money on a medium or
long-term basis and promises to pay back the lender at a fixed rate of interest.
(iv) Shares – a company may sell shares to raise capital,
(v) Insurance- is a promise for financial compensation for a risk that may or may
not occur such as accidents, theft, fire.
(vi) Investment and unit trust- are institutions that are available for persons who
want to invest their money in a company. The dividends earned are distributed
among unit trust holders. E.g. Barita Investment and Jamaica Money Market
Brokers, Mayberry Investments etc., Proven.

9.7 SOURCES OF PERSONAL CAPITAL

The following are personal sources of capital for setting up of a business
✔ Friends and family members
✔ Personal savings
✔ Government grants
✔ Loans
✔ Equity
✔ Venture capital
✔ Crowdfunding

9.8 PURPOSE OF BASIC FINANCIAL RECORDS FOR A SOLE TRADER

(a) Types of Bookkeeping Systems
▪ Single entry and double entry systems

(b) Purpose of Basic Financial Statements

▪ Income statement (Trading and Profit and Loss A/C)- this statement is to ascertain
profit or losses made during the year.

▪ Statement of financial position (Balance Sheet)- shows a list of assets and liabilities
at the end of the year.

▪ Cash Flow Statement – shows where money has come from and what it has been
spent on during the financial year.