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Answer all parts of this question: (A) Outline three items of information that a bank manager would require when considering an application for a business loan - Leaving Cert Business - Question 7 - 2008
Question 7
Answer all parts of this question: (A) Outline three items of information that a bank manager would require when considering an application for a business loan. - o... show full transcript
Worked Solution & Example Answer:Answer all parts of this question: (A) Outline three items of information that a bank manager would require when considering an application for a business loan - Leaving Cert Business - Question 7 - 2008
Step 1
Outline three items of information that a bank manager would require when considering an application for a business loan.
Answer
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Details of the Business: This includes the name of the business and the owners, along with a comprehensive business plan that outlines the objectives and operational structure.
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Accounts Overview: A presentation of financial accounts such as the trading accounts, profit and loss statement, and balance sheet, to give insight into the financial health of the business.
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Cash Flow Forecast: A projection of future cash flows, including an ability to repay any borrowing or loans, which demonstrates financial planning and management.
Step 2
Explain two reasons why a business would prepare a cash flow forecast.
Answer
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Planning for Cash Shortages: A cash flow forecast helps businesses anticipate future cash shortages, allowing them to arrange necessary funding, such as bank overdrafts, before a shortfall occurs.
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Identifying High Expenditure Periods: By analyzing expected cash flows, businesses can identify times of high expenditure, helping them strategize and manage expenses in a timely manner.
Step 3
Explain the term 'bank overdraft'.
Answer
A bank overdraft is a short-term financial facility that allows account holders to withdraw more money than they currently have available in their bank account. This is typically considered a form of credit that enables a business to cover short-term cash flow issues. Interest is charged on the overdrawn amount, making it important for businesses to manage their overdraft limits carefully.
Step 4
Step 5
Calculate the Working Capital Ratio for 2006 and 2007 and comment on the trend.
Answer
The formula for the Working Capital Ratio is:
ext{Working Capital Ratio} = rac{ ext{Current Assets}}{ ext{Current Liabilities}}
For 2006:
- Current Assets = €290,000
- Current Liabilities = €145,000
ext{WCR}_{2006} = rac{290,000}{145,000} = 2
For 2007:
- Current Assets = €300,000
- Current Liabilities = €200,000
ext{WCR}_{2007} = rac{300,000}{200,000} = 1.5
Trend Comment: The Working Capital Ratio decreased from 2 in 2006 to 1.5 in 2007, indicating a reduction in the company's liquidity position. This trend suggests that while the business still has more current assets than liabilities, it has less buffer for unexpected financial difficulties compared to the previous year.