Buisness Finance

Business Finance

Principles of Business

Various Financial Institutions

• Central banks
• Commercial banks
• Non-bank financial institutions

• Credit unions
• Insurance companies
• Building societies
• Micro lending agencies
• Government agencies

Multiple Choice

All of the following are Financial Institutions Except

• Commercial banks

• Credit unions

• central banks

Multiple Choice

All of the following are non-financial institutions except

• Central banks

• credit unions

• insurance companies

• building societies

CENTRALBANKS

• The Central Bank is a monetary authority set up by

national government to issue notes and coins,
control the money supply and regulate the banking
system. It is a state bank because it is owned by the
government. The Central bank also licenses other
banks.

• Central Banks can be found in

• Jamaica, Trinidad and Tobago, Guyana, Barbados,
• Haiti, the Bahamas, and Cuba
• https://www.youtube.com/watch?v=EXbfHZk4MPc

https://docs.google.com/document/d/1LQ-ZOfV8OeNbwfyLab6OqI_rTKwWDNzKYbreDZyJC
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Functions of Central Banks

• It serves as the government bank.

• Keeps government accounts, handles arrangements

for government borrowing in raising funds, manages
the national debt, issues treasury bills

• Its acts as an advisor to the government

• Ensures that the policies adapted by government are

in line with the needs of the country.

• Its executes the government's monetary policy.

• Exercises control over the supply of money, bank

rates and interests, and the activities of other banks.

• The banker’s bank

• All commercial banks must keep an account with the

central bank. Maintains a cheque clearing system.

• Acts as the ‘lender of last resort

• When funds are needed, and all other sources have been

exhausted, commercial banks turn to the central banks for assistance.

• Note-issuing authority

• the only authority that can issue bank notes, and thus can

control the supply of money in the economy.

Functions of Central Banks

Fill in the Blank

List 4 functions of the central bank

Commercial bank :

• This is a business that takes deposits from household and businesses, make loans, and provide other financial services such as processing payments

Functions of Commercial Banks:

● Accepting Deposits

● Examples: savings, current/personal cheque

accounts, and time/term deposits (Certificates of Deposit – CDs)

● Lending to Customers

● Examples:overdraft, loans, Treasury bills

● Making Payments on Behalf of Customers

● Examples: credit or debit transfers, standing orders,

wages

Other Services offered by Commercial

Banks:

● Providing night-safe deposit facilities

● Issuing letters of introduction, credit information and credit

reference on behalf of clients

● Providing foreign exchange services for importers and exporters,

and traveler's cheques.

● Provides financial advice.

● Buys and sells stock on behalf of customers.

● Provides safes for the storing of valuables (jewelry, documents,

etc.)

● Facilitates and encourages savings.

Multiple Choice

Which institution is responsible for regulating the money supply, controlling inflation, and serving as the lender of last resort in a country?

• Commercial bank

• Central bank

• Credit union

• Insurance company

Multiple Choice

What is the primary function of commercial banks in the financial system?

• Issuing currency

• b. Regulating monetary policy

• Providing financial services to the public

• Controlling inflation

Savings Account

• Sometimes referred to as Deposit Accounts.
• Designed for small savers who save mainly for

precautionary reasons, or for future consumption.

• In most cases customers can withdraw savings

without giving notice.

• The bank pays interest on such accounts.
• To pay in or withdraw money from the account,

credit slips and withdrawal slips are needed.

Current Accounts

• Also referred to as checking account.
• Provides a safe place to hold money for

immediate use.

• No interest is paid on these accounts.
• Upon opening an account customers are

provided with a cheque book, and a record book

• Bank statements are sent out periodically by

banks to provide an indication of the account
activity for the period.

• Money can only be withdrawn through cheque

payments, or credit transfers.

Fill in the Blank

What is the difference between current account and deposit account

Non-Bank financial institutions

• Credit unions
• Insurance companies
• Building societies
• Micro-lending agencies
• Government agencies

Credit Unions

• Non- profit organizations set up and owned by

their members. They encourage members to
save, and in return provide them with credit at
relatively low rates

Insurance Companies

• These are set up to help cover the risks of their

customers and provide compensation where a
loss is incurred, such as:

• Product liability
• Employer liability
• Fire and thief
• Motor accidence
• Death and pensions

Building societies

• These are organizations originally set up by their

members to fund shard/cooperative
house-building schemes and late to provide
mortgages, but more recently to provide a range of additional financial services.

Micro-lending agencies

• These organizations provide small loans and

other banking services to unemployed or
low-income individuals, who may not be able to
ger finance from banks.

Government Agencies

• These provide funding for businesses, including

enterprises of all sizes. They also provides
insurances cover against losses arising from non-payment by overseas buyers.

Multiple Choice

Which of the following is an example of a non-bank financial institution?

• Central bank.

• Commercial bank

• Credit union

• . Investment firm

Multiple Choice

Credit unions are financial institutions that are typically:

• Owned by the government

• Owned by their members

• Privately owned corporations

• Managed by central banks

Multiple Choice

What is the main function of insurance companies?

• Providing loans to businesses

• Accepting deposits from the public

• Managing investment portfolios

• Managing risks and providing coverage against potential losses

Multiple Choice

Building societies are financial institutions that primarily focus on:

• Mortgage lending and savings

• Commercial lending to businesses

• International trade finance

• Government bond investments

Multiple Choice

Micro-lending agencies typically provide:

• Large loans to established businesses

• Small loans to low-income individuals or entrepreneurs

• Mortgages for real estate development

• Investment advice to wealthy clients

Multiple Choice

Which type of financial institution is directly controlled by the government and serves specific policy goals?

• Commercial bank

• Central bank

• Micro-lending agency

• Insurance company

Functions offered by Financial

Institutions

• Loans/credit facilities
• Savings and deposits
• Making payments
• investments

Services offered by Financial

Institutions

• Night safe deposits
• Online banking
• Advisory services
• Credit card and debit

cards

• Trustee work
• Deposit boxes

• ATM/ABM services
• E-trade
• Settlement services
• Remittance services

Role and Function of the Financial

Regulatory Bodies

Regulatory bodies

● Central Bank: The central bank overseas the printing

of notes and coins, with the aim of ensuring that there is enough money to enable business transactions but not enough to cause inflation (a general increase in the level of prices). the central bank also licences other banks. To obtain and keep a licence, banks must act within the guidelines set out by the central bank.

Role and Function of the Financial

Regulatory Bodies

Regulatory bodies

● Jamaica Deposit insurance Corporation: The JDIC is

an insurance scheme where the government guarantees
the money held in banks. Funds deposited by businesses
and individuals into Jamaican banks are therefore safe (in Jamaica, funds of up to J$600,000 are guaranteed.)

● Financial Services Commission of Jamaica: The FSC

supervises and regulates the finance sector (including insurance companies,pension funds and securities) to make sure the public’s money is looked after in a safe way.

Role and Function of the Financial

Regulatory Bodies

Role of regulatory bodies

● Monitoring the activities of banks, credit

union, pension funds, insurance
companies, investment companies and other financial institutions

● Controlling the activities of these

financial institutions

● Guiding financial institutions.

Functions of the Regulatory Bodies

• Regulating the issue, supply and availability of

money.

• Enforcing financial regulations from government
• Administering the registering of financial

institutions.

• Enforcing licences of various financial various

financial activities, including depository, lending,
collection and money transaction activities.

• Advising the government on monetary and fiscal

matters.

Functions of the Regulatory Bodies

• To enforce regulations and licenses of

various activities, including depository,
lending, collection and money transmission
activities

• Providing statistical data to the government.
• Creating public confidence in financial

institutions

• Supervising the operations of all financial

institution, especially, commercial banks.

Relationship between financial institutions

and regulatory bodies

The regulatory role:
(a) Central Banks - Ways in which a Central Bank may

regulate commercial bank:
(i) variations in the liquid assets ratio
(ii) vary or adjust the bank rate
(iii) changing the minimum reserve requirements.

(b) Financial Service Commissions -
(c) Supervisor of insurance -

Multiple Choice

In addition to monetary policy, central banks also play a crucial role in:

• Issuing credit cards.

• Regulating commercial banks

• Providing investment advice

• Managing insurance portfolios

Multiple Choice

Which function is typically associated with non-bank financial institutions?

• Regulating monetary policy .

• Issuing currency

• Providing specialized financial services

• Accepting deposits from the public

Multiple Choice

What is the primary role of financial regulatory bodies?

• Issuing currency

• Regulating fiscal policy

• Ensuring the stability and integrity of the financial system

• Providing loans to businesses

Relationship between financial
institutions and regulatory bodies

Financial Service Commissions -

The financial services commission of a country
regulates the providers of financial services that
are not monitored and controlled by the central
bank.

The purpose of this regulation is to safeguard the public against illegal or unauthorized financial services operating within the country. eg. prevent money laundering.

Relationship between financial
institutions and regulatory bodies

Supervisor of insurance -
The supervisor of insurance is responsible for the
overall regulation of the insurance industry within
the country, in conjunction with the financial service
commission.

They have the role of checking that there are bona
fide companies capable of conducting insurance
business in a reliable and honest way.

Ways used by individuals to manage

personal income

(a) Allocation of income relative to commitments through

the use of a budget.

Budgets - a plan for the future set out in numbers.

A personal budget can be set out as follows

1. Total income
2. Total expenditure
3. Savings
4. The value of total savings

Ways used by individuals to manage

personal income

Savings - the part of an income that is not spent
Investment - the purchase of assets in order that these
assets will earn future income for you.
- Capital Gain- the increase in the value of an asset,

which is realised when the asset is sold for more than
its purchase price.

Eg. of investment: bonds, stocks/shares, unit trust,
gold/property/valuable assets.

Ways used by individuals to manage

personal income

Financial advising- Banks and other financial institutions
provide literature about personal budgeting and the
importance of being on top of your finances so that you do
not end up in debt.

Savings Vs Investments

Forms of Savings:
• Sou-sou(meeting-turn,

partner, box hand)

• Deposits in financial

institutions

• Short term fixed

deposits

Forms of investments
• Stocks market
• Government securities:

bonds, debentures

• mutual funds

Concepts of short term and long term

financing

Business need finance for both short and long term
purposes. In the short term finance is required to make
regular payments such as to pay wages, purchase
supplies, or pay electricity and utility bills. These short
term fund are called working capital
Long term finance is required to purchase the major
assets on which a business is based: land, buildings,
machinery and other permanent assets. These are
called fixed capital

Types of short term financing

• Trade credit
• commercial bank loans
• Promissory notes
• instalment credit
• indigenous credit or

private money lenders

• advances from

customers

• factoring
• venture capitalists
• crowdfunding.
• angel investors

Types of long term financing

• loans from government
• mortgage
• debentures
• shares
• insurance
• investment
• unit trusts

Personal Sources of Capital

• friends and family
• personal savings
• government grants
• loans
• equity
• venture capital
• crowdfunding

Reasons for a sole trader to keep financial records:

a. Personal records: to know how much the

business is worth and how much profit it is making.

b. Tax records: to create a record of income and

expenditure in order to calculate profits for the
tax authorities, and to calculate how much tax to
return.

c. Records for lenders: For proof of the viability of

the business if requiring a loan from the bank.

The records use to record the day to day transactions:

a. Purchases Ledger. This record all raw

materials (inventory) bought on credit

b. Sales Ledger. This records the sale of all

finished goods on credit (inventory) to consumers.

c. The General Ledger - is used to record all

other transactions like machinery, fixtures
and fittings, expenses, revenues etc.

Different types of bookkeeping.

Book Keeping - is the recording of financial
transactions
a. Single entry bookkeeping: - making a single

entry when a transaction is made

b. Double entry: Records are entered twice.

Difference between single and double entry

1. Single- entries are made for cash transaction

only where as double - entries are made for
cash transactions and credit transactions

2. Single - the two aspects of a transaction are

not mentioned where as for double - the
two-fold aspects of a transaction are shown in
the bookkeeping records

3. Single - used by very small and simple

business where as double - used by larger and
more complicated businesses

Purposes of basic financial statements

a. Income statement: Is what is used to calculate the profit the company made. that is the difference between the revenues and the cost of operating the business:

i. Sales - cost of sales = gross profit
ii. Gross profit - overhead cost = Net profit (Operating profit , Net income or retained
profit.

iii. Gross profit margin is calculating gross

profit as a percentage of Sales. This tells
the the gross profit made per sale

Purposes of basic financial statements

a. The Statement of Financial position (Balance Sheet)-this

showing the financial position of the business. that is the
value of assets and capital and liabilities the firm has at
the end of a trading period.
i. Assets are the resources that the firm owns

1. non-current assets - these are the assets that

have a long life, not bought for resale or add to
the value of the business. eg. motor vehicle,
machinery, land etc

2. Current assets - these are assets that turns iot

cash easily (liquid) eg.inventory, Accounts
Receivables (money owed for goods sold on
credit), Cash at bank and cash in hand

Purposes of basic financial statements
The Statement of Financial Position Con’t

i. Liabilities are resources that the firm owes for

goods or services supplied.
1. Non-current Liabilities - Resources owed for

over one year. eg. loans, mortgage

2. Current Liabilities - Resource owes for less

than one year - example. Trade Payables ( the
money owed for goods bought on credit)

ii. Capital- All the resources invested into the

business. eg. land, building, furniture, motor
vehicle and cash in hand or at the bank.

Purposes of basic financial statements

a. The statement of cash flow: This deals with the movement

of cash in and out of a business over a period of time.
i. Cash from operating activities: These are cash flow that

are part of net income eg. cash used to buy new stock
or cash received from sales

ii. Cash from investment activities; These are cash flows

that are related to non-current assets such as
investment in new plant and machinery (an outflow of
cash) or money earned from the sale of part of a
company's land (an inflow of cash

iii. Cash from financial activities: these are cash flows that

are related to on-current liabilities, and to changes in
owner’s capital example. cash flow from sale of shares,
or cash outflow from the payment of cash dividends.

The purpose of the statement of cash flow

a. focus purely on the cash movement in and

out of a company during a particular moment
of time

b. Identify whether the business is building up

or running down its cash reserves

c. show the net movement of cash in a specific

period of time, i.e cash in versus cash out

d. itemise the various movements of cah under

the three key heading for different types of
cash flow