What You Need to Learn
- Know the different ways a business can receive and make payments
- Understand the advantages and disadvantages of each payment method
- Explain the difference between standing orders and direct debits
- Describe how businesses use telephone, online, and mobile banking
- Understand what a business budget is and how it is constructed
- Explain the importance of cash flow and how to interpret a cash-flow forecast
- Understand contingency planning and how businesses fund start-ups and expansion
3.1 Business Banking
All businesses, regardless of size, need a way to manage their money. Specifically, every business needs to:
- Receive payments from customers for goods and services
- Make payments to suppliers, staff, landlords, and other expenses
- Keep records of all transactions for legal, tax, and monitoring purposes
There are several different methods businesses use to receive and make payments. Each has its own advantages and disadvantages.
3.1.1 Cash Transactions
Some small businesses are still paid in cash - for example, market stalls, window cleaners, or small cafes. Cash has one key advantage: the money is available straight away. The business does not have to wait for payment to clear.
However, most businesses now use a bank business account rather than relying solely on cash because:
- Cash can be lost or stolen
- It is harder to keep accurate records
- Large amounts of cash are difficult to manage safely
- HMRC requires proper financial records
3.1.2 Cheques
A cheque is a written instruction to a bank to pay a specific amount from one account to another. Although cheque use has declined significantly, some businesses still use them.
| Advantages | Disadvantages |
|---|---|
| Safer than carrying large amounts of cash | Delays in clearing - money is not available instantly |
| Can be cancelled (stopped) if lost or stolen | Cheques can bounce if the payer does not have enough funds |
| Provides a paper trail for record-keeping | Declining acceptance - many businesses no longer accept cheques |
3.1.3 Debit and Credit Cards
Most businesses accept card payments through chip-and-pin terminals (also known as PDQ machines or card readers).
| Feature | Debit Card | Credit Card |
|---|---|---|
| How it works | Takes money directly from the customer's bank account | The card company pays the business; the customer pays the card company later |
| Clearing time | Same day | 1-2 working days |
| Business use | Receiving payments from customers | Business credit cards can be used to pay suppliers and manage cash flow |
3.1.4 Standing Orders and Direct Debits
Both standing orders and direct debits are ways of making regular automated payments, but they work very differently. Understanding the distinction is vital for the exam.
| Feature | Standing Order | Direct Debit |
|---|---|---|
| Amount | FIXED amount each time | VARIABLE - the amount can change |
| Who controls it? | The customer controls the payment | The business controls how much is taken |
| Changes | Customer can start, stop, or change at any time | Business must give at least 10 days' notice before changing the amount |
| Examples | Rent, regular savings, subscription at a fixed rate | Utility bills, mobile phone bills, insurance premiums, gym memberships |
Card Sort: Payment Clearing Times
Sort these payment methods by how quickly the business receives the money:
Match the Characteristics: Standing Order vs Direct Debit
3.1.5 CHAPS and Bacs
| System | Full Name | Used For | Speed |
|---|---|---|---|
| CHAPS | Clearing House Automated Payment System | High-value payments - e.g., buying property, large business transactions | Same day (guaranteed) |
| Bacs | Bankers' Automated Clearing Services | Salary payments, supplier payments, direct debits, standing orders | Usually 3 working days |
3.1.6 PayPal for Business
Many businesses, especially those selling online, use PayPal as a payment method. PayPal for Business allows a company to:
- Add a "Buy Now" button to their website for easy online payments
- Receive payments securely - the customer does not need to share bank details with the business
- Receive payments quickly - funds are available in the PayPal business account almost immediately
- Accept payments from customers around the world
3.1.7 Telephone Banking
Businesses can manage their bank accounts by phone. Telephone banking allows businesses to:
- Check balances and recent transactions
- Make payments to suppliers and other businesses
- Set up standing orders for regular fixed payments
- Arrange CHAPS transfers for high-value urgent payments
- Deal with foreign exchange (buying and selling foreign currencies)
3.1.8 Online Banking
Online banking gives businesses 24-hour access to their accounts through a secure website. Key features include:
- View balances and statements at any time
- Make payments and transfers
- Set up and manage standing orders and direct debits
- Download transaction data for accounting software
3.1.9 Mobile Banking
Mobile banking allows businesses to manage their finances through smartphone apps. Mobile banking includes:
- Banking apps - check balances, make payments, and manage accounts on the go
- Contactless payments - using a phone or smartwatch to make quick payments
- Paym - a service that lets you send and receive payments using just a mobile phone number
- Pay by Bank - allows customers to pay directly from their bank account via their banking app
3.2 The Key Features of Business Budgets
3.2.1 Business Records
All businesses must keep accurate financial records. There are several important reasons for this:
- Legal reasons - businesses are required by law to keep financial records
- Tax purposes - HMRC requires records to calculate how much tax the business owes
- Monitoring performance - records help the business track whether it is making a profit or a loss, and spot trends over time
- Decision-making - accurate records help owners and managers make informed decisions about the future of the business
3.2.2 Business Budgets
A business budget is a financial plan that shows expected income (revenue) and expenditure over a period of time. The basic formula is:
Typical Business Expenditure
Businesses have many different types of costs. Common expenditure items include:
| Expenditure Type | Examples |
|---|---|
| Rent | Payments for business premises (shop, office, factory) |
| Energy and utilities | Gas, electricity, water, broadband, telephone |
| Wages and salaries | Payments to employees for their work |
| Raw materials | Materials used to make products (e.g., wood, metal, fabric) |
| Stock and supplies | Goods bought for resale, office supplies, packaging |
| Finance costs | Interest on loans, bank charges, overdraft fees |
| Repairs and maintenance | Keeping equipment and premises in good working order |
| Taxes | Corporation tax, business rates, VAT payments |
Revenue (Income)
Revenue comes primarily from customers paying for goods and services. However, businesses may also receive money from:
- Loans - borrowed money from banks or other lenders
- One-off receipts - such as selling old equipment, receiving a grant, or insurance payouts
Case Study: Sue Baker's Bakery
Sue Baker owns a small bakery and wants to increase her market share. She decides to run a "buy one get one free" offer on selected items.
This means her revenue per item decreases in the short term (because she is effectively halving the price on some products), but she hopes the increased number of customers will:
- Attract new customers who may become regulars
- Increase overall sales volume
- Lead to higher total revenue in the long term
Sue must budget carefully to ensure the promotion does not cost more than the extra sales it generates.
3.2.3 Flexibility and Contingency Plans
No budget is perfect. Unexpected events happen, and businesses must be prepared. A contingency plan is a "Plan B" - a backup strategy for when things do not go according to the original budget.
Businesses can prepare for the unexpected by:
| Strategy | How It Helps |
|---|---|
| Keeping a cash reserve | Money set aside for emergencies - like an emergency fund for individuals |
| Taking out insurance | Protects against specific risks such as fire, flood, theft, or loss of key staff |
| Arranging an overdraft facility | Allows the business to spend more than is in its account, up to an agreed limit, providing a short-term safety net |
| Having a "Plan B" | An alternative strategy if the original plan fails - for example, a different supplier, a different marketing approach, or cost-cutting measures |
3.2.4 Cash Flow
Cash flow is the flow of money in and out of a business. It is NOT the same as profit. A business can be profitable on paper but still run out of cash if the timing of payments is wrong.
- Cash inflow - money coming INTO the business (e.g., sales revenue, loans, investment)
- Cash outflow - money going OUT of the business (e.g., rent, wages, stock purchases)
- Net cash flow = Cash inflow − Cash outflow
| Budget Surplus | Budget Deficit |
|---|---|
| More money coming in than going out | More money going out than coming in |
| Net cash flow is positive | Net cash flow is negative |
| The business has money available | The business may need to borrow or cut costs |
Case Study: Tom's Toy Shop - Cash-Flow Forecast (Jul-Dec)
Tom has prepared a cash-flow forecast for the second half of the year:
| Jul | Aug | Sep | Oct | Nov | Dec | |
|---|---|---|---|---|---|---|
| Opening balance | £5,000 | £3,000 | −£1,000 | −£3,000 | £2,000 | £12,000 |
| Cash inflow | £8,000 | £6,000 | £8,000 | £12,000 | £20,000 | £30,000 |
| Cash outflow | £10,000 | £10,000 | £10,000 | £7,000 | £10,000 | £17,500 |
| Net cash flow | −£2,000 | −£4,000 | −£2,000 | £5,000 | £10,000 | £12,500 |
| Closing balance | £3,000 | −£1,000 | −£3,000 | £2,000 | £12,000 | £24,500 |
Analysis: Tom's cash-flow forecast shows a cash deficit problem in August, September, and October. His closing balance goes negative, meaning he does not have enough cash to pay his bills, even though his business is profitable overall.
The solution: Tom arranges a £12,000 overdraft facility with his bank. This allows him to continue operating during the quiet summer months when cash outflows exceed inflows. By November and December, the Christmas rush brings in significantly more revenue, and by the end of December his closing balance is a healthy £24,500.
3.2.5 Funding Start-Ups and Expansion
Starting a new business or expanding an existing one requires capital (money). Businesses can raise funds in several ways:
| Source of Funding | How It Works | Key Points |
|---|---|---|
| Business plan | A document that outlines the business idea, target market, financial forecasts, and how the money will be used | Essential for convincing banks and investors to provide funding |
| Bank loans | Borrow a fixed amount from a bank and repay with interest over a set period | Requires a strong business plan; the bank may ask for security (collateral) |
| Investors | Individuals or firms provide money in exchange for a share of the business (equity) | The business owner gives up some ownership and control in return for capital |
| Floating on the stock exchange | Selling shares in the business to the public through an IPO (Initial Public Offering) | Raises large amounts of capital; only suitable for larger businesses. The business becomes a PLC (Public Limited Company) |
True or False: Business Banking and Budgets
Practice Quiz
Flip Cards: Key Terms
Summary
| Topic | Key Points |
|---|---|
| Cash | Instant but risky; most businesses use a bank business account |
| Cheques | Safer than cash, can be cancelled; now clear in 1 working day with imaging |
| Cards | Debit = same day; Credit = 1-2 days. Credit card surcharges banned since 2018 |
| Standing orders vs Direct debits | Standing order = fixed, customer controls. Direct debit = variable, business controls (10 days' notice) |
| CHAPS vs Bacs | CHAPS = high-value, same day. Bacs = salaries and regular payments, up to 3 days |
| Business budgets | Revenue - Expenditure = Profit. Must plan for all income and costs |
| Cash flow | Flow of money in and out; surplus (positive) vs deficit (negative). Cash flow is not the same as profit |
| Contingency | Cash reserve, insurance, overdraft, Plan B - prepare for the unexpected |
| Funding | Business plans, bank loans, investors, floating on the stock exchange |
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