Household and Business Finance Unit 4 – Managing 2 Household and Business Finance

The following topics are covered in this chapter Sources of income for a household and a business. Cash Flow Forecast for a Business and Household. Loans. Sources of Finance.

Sources of Income for a Household and a Business The following are the main sources of income for a household and a business: Household Income Business Income 1. Wages and Salaries Income from Sales 2. Child Benefit Allowances Interests on Investments, e.g. Dividends 3. Social Welfare Payments Grants/Subsidies Received 4. Interests on Investments, e.g. Interest on a savings account Sale of a Fixed Asset, e.g. Sale of machinery 5. Money invested by the owners.

Sources of Finance for a Household and a Business Short-Term ( One Year ) Creditors 2. Bank Overdraft 3. Loan from a credit union 3. Factoring Medium-Term ( 1–5 Years ) Leasing 2. Hire Purchase 3. Term Loan Long-Term ( Over 5 Years ) Savings 1. Debenture (long-term loan) 2. Mortgage 2. Retained earnings 3. Ordinary Share Capital ( Equity)

Short term sources of Finance Bank overdraft This is a short term loan given to current account holders designed to meet short-term needs. The account holder withdraws more than the amount in their account and are charged interest. Creditors Suppliers give an agreed period of credit to their customers, who sell the goods and have the use of the money until the invoice has to be paid. No interest is charged or security required.

Short term sources of Finance Accrued expenses These are expenses that do not have to be paid until after the service has been provided. E.g. Telephone, electricity etc By delaying payment, the firm can use the money for other purposes. Credit card This allows a card holder purchase goods and services up to a specified credit limit. The credit card provider sends out a statement, the balance of which must be paid immediately if no interest is to be charged.

Short term sources of Finance Taxation The business collects taxes on behalf of the Revenue. These taxes are held by the business for a period of time before being forwarded to Revenue.

Medium term finance Leasing Hire purchase Leasing an asset gives a firm the opportunity to use it without owning it. The business does not purchase the asset, it rents it from the company. Hire purchase Purchasing assets and paying by instalments over an agreed period of time. Buyer obtains immediate possession and use of the asset but does not become the legal owner until last instalment is paid.

Medium term finance Term-Loan This is a loan from the bank that is repaid in fixed instalments over an agreed period. It is negotiated with the bank after completing a loan application form. Banks may demand security (collateral) in the event of non-repayment.

Long-term Finance Long-term loans Share capital Long term loans for a household are called a mortgage. A debenture, is a loan to a company, usually for expansion. Security will usually be the title deeds to the firm. Share capital This is provided by the shareholders (owners) who buy shares in the company. Shareholders receive a share of the profit in the form of a dividend if the company makes money.

Long-term Finance Retained earnings This is profit not paid out in dividends but re- invested back into the business. It is a free source of finance and no security is required. If it is continuously used, shareholders may become dissatisfied with the lack of dividends.

What is Cash Flow?

Cash Flow Forecast Cash flow refers to the flow of money into and out of a business or household over a specified period of time. Cash flows into a business through: Sales, debtors, grants, borrowing, investments. Cash flows out of a business through; Purchases, wages, advertising, machinery, creditors, taxes, dividends, interest on loans. http://www.irishtimes.com/newspaper/finance/201 1/1219/1224309258227.html

€ Cash Flow Cycle Materials and Wages Production of goods and services Sale of goods and services

2009 Higher Level Paper