Topic 1.3

• Short term finances are used to help maintain a positive cash flow and unexpected changes in customer orders
• 2 examples of short term finances:

  Overdraft and Trade credit
• Overdraft is an agreement between a bank and a business to allow them to overspend money.
• Features of overdraft :

  Variable interest - the cost of borrowing money will change when the interest rates change

  Flexibility - the business only need to pay when overdraft is used

  Demand - Bank may demand full payment within 24hrs
• Trade credit is the ability to buy stock now and pay it later. Have to have a good relationship with your suppliers
• Long term finances are used to cover large scale plans like expansion of the business
• Examples of Long term finances:

  Crowdfunding

  Bank Loan

  personal savings

  retained profits

  Share capital

  venture capital
• Personal savings is money that has been saved up by the entrepreneur
• Venture capital is money invested by a group who are willing to start a funding for a new business in exchanged for an agreed share.
• Share capital is money raised by shareholders
• Bank loan is money lent to a business that is paid off with interest
• Profit is money left over once all costs have been paid
• Cash is all the money available in the business bank account
• Credit is the amount of money that an institution or supplier will allow a business to use but is payed back
• How to calculate interest:

  Repaid - borrowed = interest
• Banks have to make money too. When you get a loan you pay more than you borrowed.
• How to calculate rate of interest:

  total interest/borrowed amount x 100
• The lower the interest rate > the cheaper it is to borrow

  The higher the interest rate > the more expensive it is to borrow
• Retained profit is when a business saves the profit it has made to reinvest in order to expand
• crowdfunding is raising money or funding a business online from a large number of people to invest.eg. go fund me
• Adv of crowdfunding:

  
  

  A form of market research, so if people don't invest as much it means the business is unattractive

  
  

  Dis of crowdfunding:

  Business has to be interesting or it will fail

  Difficult to reach funding market
• Cash Flow is the money that comes in and out of a business
• Cash inflow is money that comes in to the business over a period of time

  Cash outflow is money that comes out of the business over the same period of time
• Net cash flow = cash inflow - cash outflow
• Cash forecasting is allows business to plan for the future, assist business in making important decisions and manage cashflow in order to survive and not go into dept
• Positive net cash flow is when more money is coming in the business than out
• The main cash payments a business may include:

  Payments to suppliers

  Payments to employees

  Overheads ( rent, electricity )
• Failing to manage cash and cashflow can cause business failure
• Cash forecasting is most important for 3 types of businesses:

  New businesses

  Fast growing businesses

  Seasonal businesses e.g ice-cream van
• Opening balance is the amount of money a business starts with at the beginning of a period of time
• Closing balance is the amount of money a business has at the end of a period of time
• Closing balance = Net cash flow + opening balance