Understanding Money: Finance Basics

Legal Tender and Unit of Account

• Legal tender is money accepted by law for buying goods and services.
• A unit of account is a way to assign value to goods and services.

Store of Value and Means of Exchange

• A store of value means money holds its value over time.
• A means of exchange is using money to buy or sell goods and services.

Planning Expenditures

• Benefits of planning expenditures include a better credit score, avoiding debt, and setting financial goals.
• Risks of not planning expenditures include poor credit ratings, inability to save for the future, and getting into debt.

Account Types and Features

• Standard accounts often have no banking fees, a debit card, and direct deposit options.
• Premium accounts usually provide package benefits, discounts, and/or interest on credit balances.
• Student accounts frequently have discounts, debit cards, and interest-free overdraft periods.
• Basic accounts often have no banking fees, a debit card, and no interest.

Accounting Purposes

• Recording transactions is vital to tracking money flow andensuring payments and bills are timely.
• Accounting helps manage businesses through planning, monitoring performance, and controlling spending.
• Accounting helps evaluate financial performance and success through indicators like gross and net profit, sales revenue, and expenditure levels.
• Accounting controls include reviewing trade receivables and payables.

Capital Income Examples

• Mortgages, shares, debentures, owner's capital, and loans are examples.

Capital Expenditures

• Capital expenditures involve spending money on assets for long-term use in a business.
• Tangible assets include land, buildings, machinery, equipment, and vehicles.
• Intangible assets include goodwill, patents, and trademarks.

Revenue Expenditures

• Revenue expenditures involve daily operating costs for a business.
• Examples include rent, wages, salaries, marketing costs, and postage, which are day-to-day expenses.

Salaries vs. Wages

• Salaries are fixed annual payments, typically paid monthly.
• Wages are hourly payments.

Financial Transactions and Costs

• Bank charges are fees associated with using a bank account.
• Administrative costs are expenses related to running a business.
• Utilities (water, heating, and lighting) are costs related to using utilities.
• Insurance is required for public liability and employer liability.
• Retained profits are profits kept in the business, instead of being distributed to the owners.

Internal Sources of Finance

• Retained profits are internal sources of finance.
• Selling assets is an internal source of finance, and can generate cash from surplus assets or unused assets.

Loans and Hire Purchase

• Loans provide immediate access to funds.
• Loans include fixed repayments and can require collateral.
• Hire purchase involves making regular payments for an asset.

Other Financial Services

• Independent Financial Advisors (IFAs) provide financial advice and have qualifications and expertise.
• Price comparison websites show comparing features and prices of financial products.
• Debt counsellors offer personalized financial advice, particularly related to budgeting and creditor negotiations.
• The Money Advice Service is a free government agency offering budgeting and financial advice.

Individual Voluntary Arrangements (IVAs)

• An agreement between the individual and creditors to pay off debts over time.
• Helps avoid bankruptcy and to keep some assets from being sold.

Bankruptcy

• A legal declaration that a person cannot repay debts.
• Results in losing assets.

Cash Flow Forecasting

• A cash flow forecast estimates expected cash inflows and outflows.
• Key components of a cash flow forecast include inflows (money entering), outflows (money leaving), net cash flow (difference between inflows and outflows), opening and closing balances.
• Cash flow forecasts help plan for cash needs and surpluses, improve decision-making, and secure funding options.
• Common causes of cash flow problems include late payments from customers, high overhead costs, and unexpected expenses.

Break-Even Analysis and Break-Even Point

• Break-even analysis identifies the point where revenue equals total costs.
• Break-even analysis can aid in setting target sales, profit, and cost goals.
• Variables that impact the break-even point include: costs, fixed costs, selling price, unit variable costs, variable costs, and profits.

Statement of Financial Position (SOFP)

• It's a snapshot of a company's assets, liabilities, and equity at a specific time.
• The fundamental accounting equation is: Total Assets = Total Liabilities + Total Equity.
• Assets are categorized as current assets or non-current assets and liabilities as current liabilities of long-term liabilities.

Financial Ratios

• Ratios measure the relationship between line items in financial statements.
• Liquidity ratios (current ratio, liquid capital ratio) evaluate a business's ability to meet short-term obligations.
• Profitability ratios (return on capital employed) assess a company's efficiency in generating profits.
• Efficiency ratios (trade receivables, inventory turnover) assess how efficiently a business manages its resources.
• Limitations of financial ratios include reliance on averages, outdated data, varying accounting methods, and market contexts.

Prepayment and Accruals

• Prepayments are payments made in advance;
• Accruals are expenses incurred but not yet paid.

Statement of Comprehensive Income

• Records revenue, expenses, and profits over a period
• Gross profit = sales revenue - cost of goods sold
• Operating profit = gross profit - selling and administrative expenses
• Net profit = operating profit- tax.

Financial Ratio Limitations

• Averages can hide internal differences in performance.
• Data can be outdated, affecting the relevance of the analysis.
• Different accounting practices can distort the comparisons, creating issues in evaluating financial health.
• Market contexts, factors like investment, and other competitive dynamics should be considered when reviewing ratios
• Different industry benchmarks can also create inaccuracies in evaluations.

Explore the fundamental concepts of money, including legal tender, unit of account, and the planning of expenditures. Learn about different types of bank accounts and their features, helping you make informed financial decisions and manage your money effectively.