Introduction to Business Finance.

It will show what payments have been received and how much the business still owes.

It also records all the invoices and credit notes the buyer has been sent.

This is an ongoing process.

It will occur on a regular basis - often monthly.

It does not specifically follow the issue of any other document.

Remittance Slips Advice

The buyer sends this document to the seller advising that payment is being made to them.

If the buyer is paying an invoice by cheque, they will usually include this with the remittance advice.

These will be used on a regular basis.

They will always follow the invoice.

Cheques

Businesses that have accounts with banks or building societies will be issued with a cheque system.

A cheque is a method of payment for the buyer and seller to use.

Usually, the buyer will write a cheque to make payments according to an Invoice or the amount on the Statement of Account.

It is a safe method of payment, as it can be sent through the post and only the payee can use the cheque.

These will be used on a regular basis.

They will always follow the purchase and the business receiving its goods.

It may be sent after the Invoice has been received or after the Statement of Account.

Receipts

This is usually sent by the seller to the buyer.

It shows the buyer that the payment has been received.

It gives the business a record of its payment.

This is the end of the process.

It will be sent out when the seller has received and processed the money from the buyer.

Methods of Producing Financial Documents

* Financial documents can be produced by a number of methods.

* The documents will be produced through a variety of processes.

* Each method will have its advantages and disadvantages.

* A business will choose its methods according to a variety of reasons including tradition, preference and the finance available.

* A business can produce the financial documents manually or through the use of IT.

* There are a number of accounting systems that a business can use:

Methods of Payment

Introduction

* A business must focus on the methods of payment available to itself and its customers.

* A business will need to make payments for all of its purchases.

* A business will receive payments for the goods it sells or the services it provides.

* There are a variety of methods of payment available to the business and to customers.

* These methods will have varying costs attached to them.

* Each payment method will also take different time periods to occur.

Cash

* This has traditionally been the most common method of payment.

* As time passed, technology has allowed for the introduction of other methods that has meant that cash is less commonly used by businesses today.

* It is still an essential method, and basically refers to actual money.

* Money consists of coins and notes.

* This method is the quickest way of paying.

* All businesses and consumers also accept it.

* Cash transfers instantly and can be used again instantly.

* Cash can be kept at banks and building societies to ensure it is safe.

* Both businesses and customers will use cash.

Cheque

* This is a method of payment that is used by both business and customers.

* It acts as a substitute for cash when making a transaction.

* The chequebook is issued by the account holders bank or building society.

* A cheque guarantee card will be issued as well.

* When an account holder writes a cheque the receiver will present this cheque to the account holder's bank via their own bank.

* The bank or building society will then transfer the money to the receiver of the cheque.

* After a few days, the money will be then taken from the account holder's account.

* The cheque guarantee card shows the receiver that whether the account holder has money or not, the bank will make the payment.

* This means if the account holder does not have sufficient funds to cover the cheque the receiver is guaranteed cash.

* The bank will charge account holders who do not have sufficient funds to cover any cheques written.

Debit Cards

* This is another method of payment that is offered by banks and building societies.

* It is available to both businesses and customers.

* A debit card allows the account holder to make purchases without actually using any physical cash.

* The bank or building society will issue the account holder with a debit card.

* This card allows the holder to make an electronic transaction to pay for items.

* The card will be processed through a machine and this takes the money from the persons account.

* In many circumstances the machine will make contact with the bank or building society to ensure the cardholder has sufficient funds in their account.

* This allows the cardholder to make instant purchases and the receiver of the payment will have that money placed into their account.

Credit Cards

* This is a card that is issued by banks, building societies and other financiers.

* It is available to both customers and businesses.

* The card allows the holder to make purchases on credit.

* The credit card company covers the payment the holder makes.

* The cardholder will then be expected to pay the credit company back.

* The card will have a maximum limit over which the holder cannot spend.

* This allows the holder to make purchases without actually having the physical cash.

* The receiver of the payment will have that money debited to their business account.

* There is an extra cost with credit cards.

* The cardholder will be expected to pay interest on the money they borrow through their card.

* A store card works on a similar basis but a particular shop or group of shops issues it.

* The holder can use that card to make purchases in the shops that are participating in that credit scheme.

Direct Debit and Standing Orders

* This is a system that a business or customer can arrange with a bank or building society.

* The system allows for payments to be made directly from the persons account.

* The account holder will need to arrange the facility by completing a number of forms that authorise the movement of money from their account.

* A direct debit is when a variable amount will be taken from the account on a regular basis.

* An example of this could be payment of a phone bill.

* A standing order is when a specified amount is taken from a persons account on a regular basis.

* An example of this could be the businesses rent.

Advantages

Method of Payment

Advantages

Cash

This is still the most common way of paying for goods and services

Easy to use and understand

Can be used by all ages without identification

Cheque book

A written instruction by an account holder to their bank to pay a named person a sum of money

Can be sent through the post

Can be used by individuals without the need for specialist machinery

Cash point card

Allows people to withdraw money from a machine in the wall of a bank

Access to thousands of machines

Can withdraw cash out of banking hours

Credit card

This allows people to purchase goods over the counter, telephone and through the post from a range of companies

Allows 8 weeks interest free credit

Gives insurance cover

Records all transactions

No interest charged if account is paid immediately

Debit/Switch card

This enables customers to make a payment from their bank account without having to write a cheque

Easy to carry (does not need a lot of room)

Convenient way to pay for goods and services without going into credit

Store card

This enables customers to buy goods at one particular shop without using cash or cheques

Might get a discount for using this type of card

Buy goods on credit

Store card

This enables customers to buy goods at one particular shop without using cash or cheques

Might get a discount for using this type of card

Buy goods on credit

Direct Debit/Standing Order

This allows the payments of bills or debts directly from a bank account on a regular basis.

Convenience

Ensures bills are paid on time

Sources of Finance

Introduction

* A business must make sure it has finance available for its daily operations.

* It must also have finance available for major purchases such as premises, machinery and equipment.

* There are a variety of sources of finance a business can use.

* Each source will have different credit terms.

* The different types of finance will be repayable over differing time periods.

* The business will also find that each source is suitable for different types of purchases and business needs.

* Finance can be from the owner's funds, loans, retained profits or grants from the Government.

Time Periods

* When borrowing money a business will have to repay it over a specific time period.

* That time period will vary according to the type of finance they have acquired.

* A business must ensure that as well as choosing the most suitable source, it chooses the most suitable time period.

* In many circumstances the repayment time will be the most crucial factor in the businesses decision.

* The time period is classified into three main areas:

TIME PERIODS

Short-Term Finance

Medium-Term Finance

Long-Term Finance

This is finance the business must pay back within a year of borrowing the money.

This is often finance the business uses to ensure it can operate on a daily basis.

This is finance the business must repay between one to five years.

This is often the type of finance that the business will use for equipment and some machinery or transportation.

This is the finance a business will pay back over a time period of five years or more.

This is the finance the business will use to pay for expensive assets such as major machinery and the premises or land.

Overdraft

* This is a short-term method of finance for the business.

* It is a source that is available to the business from banks and building societies.

* The bank will give the business an overdraft limit, which allows them to spend money that it does not actually possess at that time.

* The business will be expected to only use the overdraft when necessary - the bank or building society will not expect the business to be at the overdraft limit at all times.

* The amount of the overdraft will depend on the size and status of the firm - if the business has a good reputation or is large in size they are generally granted a larger overdraft.

* The business will be charged interest on this facility, and it must ensure that the overdraft is pre-arranged with the bank or building society.

Owners' Funds

* This refers to the money that the owner or various owners put into the business.

* It is money that the owner will use from their own personal funds.

* This money will not be paid back as other sources would, as the owner will receive the profits or a share in the profits of the company.

* These people will find the money from various sources:

* In a sole trader one person will provide the owners' funds.

* In a partnership the money will come from the various partners - usually between two and twenty people.

* In limited companies the funds come from the shareholders - there will be various numbers of these, usually more in a public limited company.

Loans

* Another source of finance available from banks and building societies are loans.

* These can be repaid over a number of years, meaning the loans can be short, medium or long term.

* The business must approach the bank or building society with details of the amount of finance required and their repayment plans.

* Often, the institute making the loan will require a number of documents detailing how the business will be able to pay the loan bank.

* The larger the amount required, the more evidence the business will have to produce to show its ability to make repayments.

* These documents will often include a cash flow forecast, budgets, business plan and final accounts.

* The business may be required to offer something as collateral.

* This means something to secure the loan against - if the business cannot make the repayments then this asset can be taken by the bank or building society.

Profits

* Once a business has begun trading it will usually begin receiving profits.

* A business must make decisions about what it will do with these profits.

* It has the opportunity to distribute the money amongst the owners of the business.

* Another option is to put some, or all of the money back into the business.

* This is known as retained profit.

* A business can use this source for daily operations or for purchasing major assets such as machinery.

* This obviously does not require repayment and many owners will use this money to help the business meet its long-term goals.

Government Grants

* In some cases the Government will provide funding for businesses.

* This could be for many reasons:

* These grants are given by the Government, which means they do not have to be repaid.

* This makes it a very effective source of finance for any business.

* Often, grants are given to businesses that are set up in Development Areas or Enterprise Zones.

* These grants are to encourage businesses to set up in deprived areas or areas of high unemployment.

Hiring and Leasing

* In some cases a business may not have the finance available to buy assets outright.

* In these circumstances a business will look for alternative sources of finance.

* There are two methods that allow businesses to have access to factors such as machinery or transportation, without actually paying all the money up front.

* The first method is leasing, when the business sets up a contract with a leasing firm.

* The business will pay a given amount every month for the use of the asset.

* The leasing firm will be responsible for maintenance and repair but the business will never own the asset.

* A business can also choose Hire Purchase.

* This is where the business again pays monthly amounts for the use of the asset.

* When the total value of the asset is repaid (including interest) the asset then belongs to the company.

Shares and Legal Entity

* A business can also gain finance through the actual ownership of the firm.

* This means that the business will lose some control of the business but it will make extra finance available.

* This method also means that they will not have expensive repayments to make.

* There are two methods the business can use.

* The first is selling shares in the company.

* This means other people can purchase the shares and become part owners of the business.

* The other method is to change the legal entity of the business.

* This means that the business actually goes through the process to have a different type of ownership

INITIAL OWNERSHIP

NEW OWNERSHIP

Sole Trader

Partnership

Partnership

Private Limited Company

Private Limited Company

Public Limited Company

* Some business may also decide to look at the option of becoming a Franchise.

* This allows the business to expand and become better known.

* It also means that for every franchisee the business will receive money.

Selling Assets

* In some situations a business may consider selling certain parts of its property in order to gain finance.

* The business may sell its assets to specialised companies or to other businesses that require similar assets.

* These assets include machinery, equipment, ICT and transportation.

* This is usually a method that businesses will only use in times of cash flow problems.

* Some businesses will use Sale and Leaseback.

* This is where the assets are sold to a specialist firm for a cash sum, and then the business will lease the asset for a monthly fee.

Advantages and Disadvantages

Source of Finance

Advantages

Disadvantages

Overdrafts

Easy and quick to set up.

Only pay interest on amount used not whole amount

Repayable

Interest Charged

Owners Funds

Does not need repaying

No loss of control

Owner must raise money

No interest repayments

Loans

Receive large sums of finance

Repayable

Interest charged

Profits

Not repayable

Easy and quick access to finance

Owners and shareholders receive less money

Grants

Not repayable

Helps small businesses

Helps with start-up and in troubled times

Not available to all businesses

Businesses must meet certain criteria

Hiring and Leasing

No need for large sums of cash

Update equipment

May be interest charged

Never actually own asset

Shares and Legal Entity

Receive finance

Not repayable

Loss of control of the business

Must share the profits

Selling Assets

Quick and easy

Receive sums of money

Loss of asset

May have to pay leasing or hiring charge.