BTEC Revision Guide Unit 3 Personal Business Finance Summary

Functions of Money

• Unit of Account: Money provides a standard measure of value for goods and services, expressed as a price (e.g., pounds and pence in the UK).

• Means of Exchange: Money simplifies transactions by serving as an intermediary for buying, selling, or trading goods and services, avoiding the complexities of bartering.

• Store of Value: Money retains its value over time, allowing it to be saved (e.g., in a bank) and used for future purchases.

• Legal Tender: Money is the legally recognized form of payment for goods and services within a country; it's the official national currency.

Role of Money

• Personal Attitudes: An individual's approach to risk and reward influences their financial decisions (e.g., risk-taking for high returns vs. safe saving).

• Culture: Cultural backgrounds, religious beliefs, and ethical principles can shape one's view of money and its use.

• Life Stages: Financial priorities and needs evolve through different life stages (childhood, adolescence, young adulthood, middle age, old age).

• Life Events: Major life events, such as moving or job loss, can significantly alter one's perception of the importance of money.

• External Influences: Economic conditions and job availability, which are often beyond personal control, affect financial perspectives.

• Interest Rates: Interest rates influence saving and borrowing decisions; low rates favor borrowers, while high rates benefit savers.

Planning Expenditure

• Why Plan Expenditure?

  • Control costs to avoid financial difficulties.

  • Avoid debt accumulation.

  • Counteract the effects of inflation.

  • Provide insurance against potential losses or illnesses.

  • Set clear financial targets and goals.

  • Avoid legal repercussions or repossession of assets.

  • Maintain solvency.

  • Preserve a good credit rating.

  • Avoid bankruptcy.

  • Generate income and savings.

• Benefits of Planning:

  • Enables funding of purchases.

  • Ensures money is available for future needs.

  • A good credit rating enables borrowing for large purchases (e.g., car, home).

• Risks of Not Planning:

  • Debt accumulation.

  • Insufficient funds for loan repayments.

  • Legal actions due to non-payment.

  • Asset repossession.

  • Poor credit rating.

  • Inability to save for the future.

Ways to Pay

• Cash (Notes and Coins):

  • Accepted in most places.

  • Disadvantages: Risk of theft/counterfeiting, not usable for online purchases.

• Debit Card:

  • Payment taken directly from the bank account.

  • Advantages: Secure, contactless options for small amounts.

  • Disadvantages: Risk of overspending, potential for card details being hacked.

• Credit Card:

  • Payment made by the card issuer.

  • Advantages: Short interest-free periods, usable online.

  • Disadvantages: Risk of overspending/debt, high-interest rates after the interest-free period, potential for card details being hacked, fees charged by some retailers.

• Electronic Transfer (Direct Payment):

  • Payment made directly between bank accounts.

  • Advantages: Easy to set up and instant.

  • Disadvantages: Requires accurate bank details of the third party.

• Cheque:

  • A written order to pay a sum of money.

  • Advantages: Fairly secure.

  • Disadvantages: Payee must cash, takes at least three days to clear, and not accepted by all retailers.

• Direct Debit:

  • Authorization to a third party to collect varying amounts of money from a bank account.

  • Advantages: Simple for regular bills.

  • Disadvantages: Amounts may vary, requiring sufficient funds.

• Standing Order:

  • Instruction to a bank to make regular set payments to a person or organization.

  • Advantages: Payments do not change, allowing expenditure planning.

  • Disadvantages: Requires sufficient funds, continues until canceled.

• Prepaid Cards:

  • Cash loaded onto a card.

  • Advantages: Widely accepted, helps control expenditure.

  • Disadvantages: Cash lost if the card is lost/stolen, potential fees.

• Charge Cards:

  • Short-term, interest-free loan; balance must be paid in full at the end of every month.

• Contactless Cards:

  • Payment made by touching the card to a terminal.

  • Advantages: Fast, easy, secure.

  • Disadvantages: Spending can be difficult to track.

• Store Cards:

  • Similar to credit cards, but only accepted by the issuing store.

  • Advantages: Discounts, loyalty schemes.

  • Disadvantages: Interest payable, potential annual fees.

• Mobile Banking:

  • Online banking via smartphone/tablet.

  • Advantages: Check balances, make payments/transfers, secure, accessible with internet.

  • Disadvantages: Limited service range.

• BACS and Faster Payments:

  • Electronic payments between bank accounts.

  • BACS: Takes three days.

  • Faster Payments: Transfer within two hours.

• CHAPS:

  • Guaranteed same-day transfer.

  • Disadvantage: Fee charged.

Current Accounts

• Standard Account:

  • Requires a fair credit rating.

  • Features: No banking fees, cheque book/bank card (often contactless), option to set up direct debits/standing orders, salary payments, overdraft facilities (high interest).

• Packaged, Premium Account:

  • Similar to a standard account, with additional features for a monthly fee.

  • Features: Packaged benefits (travel insurance, discounts), interest on credit balances, cash back on household bills, special rates on overdrafts; some benefits may not be used.

• Student Account:

  • Aimed at learners in higher education.

  • Features: Interest-free overdraft (up to a limit; high interest if exceeded), debit card, some accounts offer gift cards/travel discounts.

• Basic Account:

  • Aimed at customers with poor credit ratings.

  • Features: No banking fees, debit card, facility to set up direct debits.

Borrowing

• Overdraft:

  • Short-term loan to cover bills when short of cash.

  • Advantages: Easy to set up, pay interest only on borrowed money.

  • Disadvantages: High interest rates, penalty charges for exceeding limits.

• Personal Loan:

  • Used to buy expensive items.

  • Features: Fixed amount, set monthly installments over 1-5 years at a fixed interest rate.

  • Advantages: Plan expenditures.

  • Disadvantages: Arrangement fees, potential loss of secured assets if payments are missed.

• Hire Purchase:

  • Used for buying a car.

  • Features: Deposit, monthly installments over 1-5 years.

  • Advantages: Buy expensive items affordably.

  • Disadvantages: Car hired until payments complete, lender may repossess car.

• Mortgage:

  • Loan to buy property.

  • Features: 25-year term, monthly installments.

  • Advantages: Buy home, spread the cost.

  • Disadvantages: Interest rate increases may impact payments, property can be repossessed.

• Credit Card:

  • Used to buy goods and services.

  • Features: Spend up to credit limit.

  • Advantages: No interest if the full amount is paid each month.

  • Disadvantages: Higher interest rates than personal loans.

• Payday Loan:

  • Short-term loan for small amounts.

  • Advantages: Help with cash-flow problems.

  • Disadvantages: Very expensive.

Savings and Investments

• ISAs (Individual Savings Accounts): Tax-free interest or profits, limit on annual contributions.

  • Cash ISA: Savings account with tax-free interest.

  • Stocks and Shares ISA: Funds invested in shares/bonds, tax-free returns; higher risk, potential for financial losses.

  • Innovative Finance ISA: Interest earned from peer-to-peer lending.

  • Help to Buy ISA: For first-time buyers.

• Deposit and Savings Accounts:

  • Easy Access: Instant access to savings, variable/taxable interest.

  • Fixed Deposit: Set interest over a set period, no withdrawals during the period.

• Premium Bonds: Chance to win tax-free cash prizes every month, savings are secure, no interest.

• Shares (Equities): Investors receive dividends based on business performance, the share value can fluctuate.

• Bonds and Gilts: Fixed interest securities issued by companies and the government, regular interest payments, the value can fall.

• Pensions: Long-term savings schemes for retirement, employees pay through National Insurance, workplace pensions (employer adds contribution), private pensions, lump sum option.

Insurance

• Motor (Car) Insurance:

  • Legal requirement for car owners.

  • Levels of Cover: third party, third party fire and theft, fully comprehensive

  • Advantages: Protection against liability claims from other drivers

  • Disadvantages: build up a no claims bonus, expensive for new or young drivers. Policy excesses can add to costs in the event of a claim.

• Life Insurance and Assurance:

  • Pays out a sum of money in the event of death or a mixture of life insurance and investment.

  • Advantages: Life insurance pays out a sum of money in the event of death. Life assurance is a mixture of life insurance and investment.

  • Disadvantages: Payout may be larger than the total amount of premiums paid. Life assurance pay-outs are linked to the performance of investments. Pre-existing medical conditions may not be covered.

• Pet Insurance:

  • Veterinary bills can be expensive. Some policies will limit the amount of medical expenses covered. Vaccinations are not covered.

  • Advantages: Can opt for lifetime cover for serious illnesses for an additional premium. Cover provided for personal injury or damage caused by the animal.

  • Disadvantages: Pre-existing medical conditions are not covered.

• Home and Contents Insurance:

  • Covers the cost of rebuilding or repairs as a result of fire, flooding or subsidence, etc. Contents insurance covers loss or damage to personal possessions.

  • Advantages: Additional security precautions can reduce premiums

  • Disadvantages: Only covers the cost of rebuilding the property, not the market value.

• Travel Insurance:

  • Provides cover for delays, cancellation, or curtailment of the trip; loss of personal possessions; emergency medical expenses.

  • Advantages: High-risk sporting activities usually require an additional premium

  • Disadvantages: Pay-outs may not cover the full amount of the financial loss. Pre-existing medical conditions are not covered

• Health Insurance:

  • Covers some or all private medical costs with convenient treatment times, choice of illnesses and treatment to cover.

  • Advantages: You can choose the types of illnesses and treatment you want to cover

  • Disadvantages: Pre-existing medical conditions are not covered. Medical conditions which arise during the initial period of the policy may not be covered. The cost of insurance will depend upon the level of risk – the higher the risk, the higher the premium.

Financial Institutions

• Bank of England:

  • UK's central bank, regulates financial institutions.

  • Responsible for maintaining monetary and financial stability.

  • Sets interest rates, issues legal tender, independent from government.

• Banks:

  • Owned by shareholders.

  • Offer financial services (current/savings accounts, loans).

  • Advantages: Reliable, secure, private.

  • Disadvantages: May charge for certain accounts/services.

• Building Societies:

  • Owned by their members (account holders).

  • Provide financial services (savings accounts, mortgages).

• Credit Unions:

  • Financial cooperatives owned/run by members, not-for-profit organizations.

  • Offer savings/current accounts, loans.

  • Advantages: Better interest rates/savings than banks.

  • Disadvantages: Limited funds/opportunities compared to commercial banks/building societies.

• National Savings and Investments (NS&I):

  • Sells savings/investment products (premium bonds, ISAs).

  • Money invested used to finance government activities.

  • Advantages: Savings/investments are secure as government backed.

  • Disadvantages: Poor interest rate, premium bonds offer no interest payments.

• Pension Companies:

  • Sell policies allowing customers to save into personal pension schemes.

  • Disadvantages: Funds locked into savings scheme, projected income may change.

• Insurance Companies:

  • Offer policies compensating policyholders against injury/loss/damage, life insurance, and pension plans.

• Payday Loan Companies:

  • Offer short-term loans between paydays.

  • Advantages: Immediate cash, even with poor credit.

  • Disadvantages: Very expensive, easy to get into deeper debt.

• Pawnbrokers:

  • Loan money against the value of assets (jewelry).

  • Advantages: Instant cash.

  • Disadvantages: High short-term cost, risk of losing the asset.

Customer Communication

• Bank Branch:

  • Customers visit for transactions, advice.

  • Advantages: Face-to-face contact.

  • Disadvantages: Limited opening hours, travel may be required.

• Telephone Banking:

  • Simple transactions over the phone.

  • Advantages: Available 24/7.

  • Disadvantages: Automated systems can be confusing, overseas call centers may not meet customer needs.

• Postal Banking:

  • Paper statements, bill payments by check.

  • Advantages: Useful for those without online/mobile access.

  • Disadvantages: Cheques may be delayed, requires internet access.

• Online Banking:

  • Manage accounts on a computer.

  • Advantages: Available 24/7.

  • Disadvantages: Services more limited than at a branch, account holders may forget or divulge their passwords.

• Mobile Banking:

  • Manage accounts through a mobile device.

  • Advantages: Available 24/7.

  • Disadvantages: Concerns about security.

Consumer Protection

• Financial Conduct Authority (FCA):

  • Regulates financial services providers.

  • Authorizes businesses, supervises work, changes poor practices.

• Financial Services Compensation Scheme (FSCS):

  • Pays compensation for financial loss if a business can't pay claims.

• Financial Ombudsman Service:

  • Resolves complaints about financial service providers.

  • Gives advice/makes decisions based on facts, impartial.

• Consumer Credit Legislation:

  • The Consumer Credit Act (1974) regulates credit agreements, covers interest rates, credit limits, cooling-off periods, and access to credit files.

Consumer Advice

• Citizens Advice:

  • Charitable organization providing free, confidential, impartial advice on financial/non-financial issues.

  • Advisers are volunteers.

• Price Comparison Websites:

  • Compare features/prices of financial products.

  • Requires online access, sites may not identify all suppliers

• The Money Advice Service:

  • Government agency providing free financial advice.

  • Requires online access to use budgeting tools.

• Independent Financial Advisers (IFAs):

  • Provide independent advice on financial products.

  • Charge for services.

• Debt Counsellors:

  • Provide advice to help individuals struggling with debt, budgeting, and dealing with creditors.

• Individual Voluntary Arrangements (IVAs) and Bankruptcy:

  • IVA: Agreement to pay off debts over time (typically 5 years), minimal monthly payments of £200.

  • Bankruptcy: Personal possessions sold to pay debts; bankruptcy ends after 12 months, but restrictions may last up to 15 years.

Accounting

• Purposes of Accounting:

  • Recording Transactions: Track money coming in and going out for payments/taxes.

  • Compliance: Comply with financial reporting requirements, internal controls combat fraud.

  • Management of Business: Plan, monitor, control funds.

  • Measuring Performance: Gross/net profit, sales revenue, efficiency, expenditure, costs.

Accounting Tracks:

• Trade receivables: money owed to the business.

• Trade payables: money owed by the business.

Income

• Capital Income: Money used to set up a business.

  • Examples: Mortgage, loan, debentures, owner's capital, shares.

• Revenue Income: Money received on sales of goods/services.

  • Examples: Cash sales, credit sales, rent received, interest received, commission received.

Capital Expenditure

• Capital Expenditure: Assets the business plans to use over a long period. Two types: Non-current (tangible) and Intangible Assets
  *Land, Buildings and premises, Machinery and equipment, Vehicles, Fixtures and fittings, Goodwill, Patents, Trademarks, Brand names

• Depreciation: Fall in value over time.

  • Straight-Line: Reduces value by the same amount each year.

  • Reducing-Balance: Higher loss of value in early years.

Revenue Expenditure

• Revenue Expenditure: Day-to-day costs of running a business.

  • Examples: Rates, heating/lighting, rent, inventory, discount allowed, water, insurance, administration, interest paid, bank charges, wages, telephone, postage, stationery/printing, salaries, marketing.

Internal Finance

• Internal Sources of Finance:

  • Retained Profit: Profits kept for reinvestment (does not have to be repaid, no interest payable, not available to new businesses).

  • Net Current Assets: Money immediately available (cash, invoices).- Quick way of raising money. Selling off inventory reduces the costs related to holding it. May have to accept a lower price for its inventory.

  • Sale of Assets: Selling vehicles, buildings, machinery (may take time to sell, amount received may be lower than actual value).- A good way of raising funds from assets that are not needed any longer. Not all businesses have surplus assets that they can sell. May be a slow method of raising funds as some assets may take time to sell.

External Finance

*Loans: Repayments are spread over a period of time allowing the business to budget; Interest payments can be high and lenders might want security on the loan. There are two types of loans: fixed-interest loans, and variable-interest loans where the rate of interest changes over the term of the loan. Loans increase the volume of cash outflows.
*Owner’s Capital: Existing investors put more money into the business. Limited by the funds available to the owners.
*Hire Purchase: This allows the business to obtain assets by paying a deposit then making regular payments; the asset is owned by the businesses once all of the payments have been made. It is relatively expensive compared to buying in cash. It increases the volume of cash outflows, and impacts on working capital.
*Crowd-Funding: This involves raising funds online by asking people to invest a small amount of money each.. The funds may be promised but are not always committed.
*Mortgages: The business has immediate use of the property with the payments spread over time; if repayments are missed the property can be repossessed. The business needs to budget for the continuing maintenance of the property.
*Venture Capital: The investor can offer business guidance and support but They may expect quick returns on their investment. Venture capital tends to be a long-term investment.
*Trade Credit: The business is able to sell on the goods before they pay for them.. It is good for cash flow and no interest is paid. Requires robust financial records to keep track of outstanding debts
*Leasing: Set repayments are made; Leasing can be expensive and the asset never belongs to the business (unless an ‘option to buy’ is included in the agreement).
*Grants: They do not have to be paid back. Grants may not be available in the future
*Invoice Discounting: This is a short-term option with the advantage that the business is still managing the relationship with the customer.- invoice Discounting differs from debt factoring where the business 'sells' its outstanding invoices to a third party.
Donations: They can be difficult to plan and budget for- They may be affected by the state of the economy and also by negative publicity

Cash Flow

*Cash Inflows: Cash sales, Credit Sales, Bank interest received, Loans, Capital introduced ,Sale of assets
Cash Outflow: Rent, Credit Purchases, Cash Purchases, Salaries, Wages, Utilities, Purchase of assets, Value Added Tax (VAT), Bank interest paid.

Formats of forecast

Opening bank balance-Itemised receipts or cash inflows -Total of receipts added to opening balance- Itemised list of payments -Total of payments or cash outflows – this is then deducted from the total of the receipts- Closing balance – this is calculated by adding the net cash flow and opening balance together. This becomes the opening balance for the following month-

Cost and Sales

*total variable costs = variable cost per unit × quantity
*total costs (TC) = fixed costs + variable costs + semi-variable costs
*Total revenue (TR) = Quantity of goods sold × Selling price per unit
Total revenue (TR) = Total costs (TC).

• Fixed costs: incurred by the business regardless of how well it is doing.business rates).

• Variable costs Increase when the business increases its activity or output:

• total variable costs = the variable cost per unit × quantity.total variable costs = variable cost per unit × quantity

• quantity or unit Number of items sold.
  Total sales (monthly/yearly) = number of units sold X selling price X units. The total money spent.

*#Break Even
Break-even point = fixed costs/ Contribution per unit
Contribution per unit = Selling price – Variable costs per unit.
Margin of safety= sales- Breakeven Level
Months to break even= breakeven unts- units produced per month.

# Income Statement
*Statement of comprehensive income – shows whether a business’s turnover has grown or shrunk and where costs have been incurred

*Gross profit – the net sales minus the cost of goods sold
*Operating profit – the gross profit minus any selling or administrative expenses
*Net profit – the operating profit minus any other expenses before tax
*Net profit after tax – the final profit figure once the business has met its tax liabilities
*Loss is calculated similarly with the assumption that expenses exceed income or funds generated from sales.

#Statement of Financial Position
*Assets = liabilities & capital

• Assets= Financial dealings is does not show how well the business is being managed
  (tangible- intangible) non current non cash- can depreciate non cash cannot.

net assets = current assets plus its fixed assets plus intangible assets) -current liabilities*
Net current assets- subtract current liabilities from current assets

Depreciation = ( asset purchase price –estimated salvage value)/ estimated life of asset

(Used for Straight-line), the reducing balance is a series of calcs for 2 years

Profitability- measured by its profit margins, mark up and efficiency in using capital Liquidity –

the business’s ability to be able to cover its current liabilities by its current assets
Efficiency – the business’s ability to collect and pay debts and its use of stock

Gross Profit Margin Formula- (Gross profit/ revenue)100. Markup is (gross profit/ cost og sales) 100

Net profit margin: profit/revenue* 100

Liquidity Ratios Current Ratio - Current assets/ current liabilities, *should have a 1.5 of assets *Liquid- (current assets-inventory)/ current liabilities; should be * 1:1

Ratios Trade Receivables- ratio=(trade receivables/ credit sales) 365;

Trade Payable= ( Trade Paables)/(creditsale )365; Inventory turnover= (average inventory/ cost of sales )365