Financial Institutions and Budgeting Overview

This set of flashcards covers key terms and concepts related to financial institutions, financing types, budgets, and accounting methods.

Financial Institutions

Accepts deposits which provide funds for loans and provides services such as business advice, financial planning, investment management, insurance products, and arrange leases for non-current assets

Short Term Finance

Used for temporary cash shortfalls for normal trading and operating activities

Term Deposits

Putting money into a bank or other financial institution and investing it for a short period of time

Cash Management Trusts

Small amounts from a range of investors are group and the money is invested in short term money market securities, which is usually offered through banks and broking firms

Money Market

Short term money markets cater to borrowers who require money for a short period of time

Long Term Finance

Used for the funding of the purchase of assets that are used to generate returns over a long period of time

Shares

Equity financing includes capital contributions by the owner, the taking on of a partner, and in case of companies the issue of shares

Deposits

Putting money into a bank or other financial institution and investing it for a long period of time, and earns a higher rate of interest than standard savings

Debentures

Loan securities issued by public companies to the general public in exchange for cash, which must be repaid along with the interest at a fixed time in the future

Debentures are secured with a floating or specific charge over the company’s assets

Unsecured Notes

Issued by a public company usually for a shorter period of time, and there is no fixed or specific security over the company’s assets

Bank Overdraft

Short term funding for temporary cash shortages, secured against assets, with a high interest charged on outstanding amounts

Term Loan

Loan where repayments must be made but are often spread overtime, which has a lower interest rate and is usually secured by a mortgage on property

Master Budgets Purpose

Purpose is to show business owners and managers a complete overview of planned business activity and changes

Master Budget Nature

Covers a 12-month period and show forecasts of results from the implementation of strategic plans

Master Budget Importance

Is important as it show the expected results of the business as a whole as readers can see expected liquidity and profitability for the period

Capital Expenditure Budget

Reviews and plans the capital expenditure the business needs to achieve its goals and includes planned purchases, replacements or upgrades to non-current assets, and costs associated with business expansion

Financial Budget

Includes the cash budget, projected cash flows and a budgeted balance sheet

Operating Budget

Provides all the information necessary to prepare a budgeted income statement and includes revenue projections, cost of goods sold projections, estimates S+D, G+A, and financial expenses of a period

Separate budgets are combines into an overall budget and projected income statement showing expected profit at the end of the period

Budget

A proposal or plan for future activities within the business and is prepared as means of planning, coordinating, and controlling activities within a business

does this by providing a plan for future operations identifying future cash problems, showing whether the business is likely to be profitable, and improving control over business activities

Income Statement Budget

Its purpose is to allow users of the reports to anticipate the income and expenses and the resultant profit/loss over the budget period

If lower than expected, management can plan to work and improve income or expense control to bring about the desired result.

Cash Budget

Is a forecast of estimated receipts, payments, and the resultant cash position for a period of time

Is important in maintaining a business’ viability and helps to maintain a tight control over their cash and assess its liquidity position. To remain viable, it must be able to meet its short-term debts and have enough cash to keep operating

Cash Accounting

Is based on cash receipts and payments in a period, and cash flows are included even if it relates to a different period.

It does not include balance day adjustments

Reports do not include items that are not cash slows, such as discounts, credit sales, and depreciation

Accrual Accounting

Based on income earned and expenses incurred and only includes items that are recognised in the current period

Balance day adjustments are needed to ensure all items reflect the current accounting period

Reports include adjusted cash and non-cash items

Reasons to Prepare a Cash Budget - Enables

It enables management to see when its commitments are due and make sure money is available at that time, otherwise they would get a poor reputation and not be able to maintain credit

Reasons to Prepare a Cash Budget - Reveal

The budget can reveal when the business has excess funs through knowing debts in advance, and by knowing this the excess money can be invested to earn interest

Reasons to Prepare a Cash Budget - Weaknesses

It can reveal any weaknesses in the business’ debt collect policy and means steps can be made to improve this

Reasons to Prepare a Cash Budget - Important

It is important for control over the business by comparing against actual figures, to help show why differences occur and the steps to be taken to fix or adjust them