Business matters

Louise Geoghegan of Yeats College provides a rundown on the upcoming Junior Cert Higher Level Business Studies exam as well as pointers to help you to prepare

HIGHER LEVEL EXAM FORMAT PAPER ONE

This exam is 2 hours and 30 minutes long.

Section A

This section is worth 80 marks – 40 minutes allocated for this section.

You must answer all 20 questions and they all carry 4 marks each.

Section B

This section is worth 160 marks – 25 minutes per question. You must answer four questions out of six. Each question carries 40 marks. There will be 10 minutes for reading through everything at the end of the exam.

PAPER TWO

This paper is 2 hours long.

You must answer four questions from this paper and each question carries 40 marks – 30 minutes per question.

The Junior Cert Business Course is broken into four sections:

1. The Business of Living

2. Economic Awareness

3. Enterprise

4. Information Technology

BORROWING MONEY

Factors to consider before choosing a source of finance:

1. The cost of raising the finance. Consumers must shop around and research the interest charged on loans, overdrafts, etc in the different financial institutions.

2. The value of the assets to be given as security/collateral. Security/collateral is the term used for the asset that the bank will take control of in the event that the borrower cannot pay back the loan.

3. The reason the money is required. A long-term investment should be financed by a long-term source of finance. There is no need to get a five-year loan to pay for your summer holidays.

Short-term sources of finance

The following are examples of short-term sources of finance which should be repaid within one year. These sources of finance can be used to purchase household items such as groceries or clothes or in a business to purchase stock or pay wages.

1. Bank overdraft

• This is a very common source of finance and easy to obtain for current account customers.

• It is a loan from a bank which allows a current account holder to withdraw more money from their account than the account contains.

• The bank must give permission for such a loan and will set a limit on the amount which can be borrowed. Interest is charged on the overdraft balance and the overdraft must be cleared once a year.

• Overdrafts are generally used by a business to buy stock and pay creditors and by households to pay bills.

Benefits of a bank overdraft:

1. No security is required.

2. It is easy to obtain.

2. Creditors (trade credit)

• Businesses can purchase goods and services on credit which means buy now and pay later.

• Using this source of finance is particularly important as the business will get up to 90 days to pay for their supplies. This gives them time to manufacture, sell and get paid for their products before they have to pay their creditors.

Benefits of creditors as a source of finance:

1. No security has to be provided to obtain the goods on credit from suppliers.

2. It is a cheap source of finance as there are no interest repayments.

3. Unpaid expenses/accrued expenses Households and businesses can delay paying bills to free up money to spend on other items.

This may happen with electricity, telephone or gas bills but they must be careful not to overdo this as the supplier may cut off supplies or restrict services until the account is settled. This may cost the consumer a reconnection fee.

Medium-term sources of finance

The following are examples of medium-term sources of finance which should be repaid between one and five years. These sources of finance can be used in a household to purchase cars or to do home improvements. In a business they are used to purchase vehicles, machinery and office equipment.

1. Term loans

• The consumer borrows an agreed amount from a financial institution, which is advanced at the start of the loan. A repayment schedule between one and five years is agreed.

• Interest is charged by the financial institution on the amount of money borrowed.

• A business will normally have to provide security for the loan but, with the cash raised, they can avail of cash discounts when buying assets.

2. Leasing

• This form of finance allows a consumer to use an asset (rent) without having to raise the full price.

• The advantage to a business is that it allows the business to claim a tax deduction for the full leasing payments over the life of the lease.

• The downside is that the asset is not owned unless the consumer decides to buy out the lease. Leasing is appropriate for IT equipment, which may have to be changed every two to three years.

3. Hire purchase (HP)

• This involves paying a deposit on a good, for example a car. The company that sells you the car organises a payment plan for you to pay the remainder over a fixed period of time.

• The customer can take the good home immediately but they don’t own the item until the final payment is made.

• No security has to be provided to avail of this source of finance.

• It increases the standard of living of consumers who purchase necessities using this system of payment.

• If the customer falls behind with agreed payments, but has already paid more than one third of the value of the asset, the HP company cannot take back the asset without the permission of the courts.

Long-term sources of finance

The following are examples of long-term sources of finance which should be repaid over a period of time over five years. These sources of finance can be used to purchase a property or land.

1. House mortgage

Most people finance the purchase of a house or an apartment by taking out a form of long-term loan called a mortgage. Mortgages work in the following ways:

• The house buyer applies to the financial institution.

• The lender agrees to lend the money but holds the deeds of the house as security against the repayment of the loan. If the borrower defaults on the repayments the lender can recover their money through the sale of the house.

• The borrower repays the loan and interest by the end of an agreed period of time.

• It is important that the borrower gets life assurance so that their family is protected from future debts in the event of their death.

2. Retained earnings

• Retained earnings are profits, which are ploughed back into the business to create growth. This form of finance is used to allow companies to grow as their profits increase. It is like the company saves its profits for future investment.

• The shareholders have to give up some or all of their dividends but, if growth is a success, the value of their shares will increase.

3. Long-term loans/debentures

• Long-term loans are borrowed from financial institutions and must be repaid with interest between five and 25 years.

• If repayments can be met, borrowing allows the business to grow without introducing any new owners who would have a share of all future profits.

4. Government grants

A grant is an amount of money given by a State agency to an enterprise or some organisation. There are different types of grants available:

(a) Grants from IDA Ireland which are used to finance the purchase of machinery and buildings.

(b) Grants from Enterprise Ireland which are used to finance market research into export potential for Irish businesses.

(c) Training grants from SOLAS which are provided to teach workers the skills required by enterprise.

(d) Business enterprise grants from Local Enterprise Offices which are intended to support and develop small local business enterprise.