Bank Balance Sheet

A balance sheet of a bank shows all financial operations conducted by a bank for a certain period of time. It reveals the borrowed funds by them, their own funds, their sources, their placements in credit and other transactions.

It is recorded in the two ways. In the left part (asset) all assets are reflected and in the right (passive) – liabilities and capital of the bank are positioned. An asset is anything that can be old whereas a liability is an obligation of the financial institution that must be eventually paid back. The owner’s equity in a bank is often referred to as bank capital, which is the remaining amount when all assets have been sold and all liabilities have been paid. The relationship of all balance sheet components can be simply described by the following equation.

Bank Assets = Bank Liabilities + Bank Capital

Assets earn revenue and include:

-Cash in hand;

-Funds on correspondent accounts;

-Funds in reserve funds of the bank;

-Granted loans to legal entities and individuals; (client loan portfolio)

-Interbank loans granted;

-Government bonds;

-Commercial securities;

Depending on the nature of the sources of funds, all liabilities differ in terms of their duration and cost. The main sources of funds as a rule, are deposits of individuals and legal entities, and in addition, funds of central (national) banks and loans obtained from other commercial banks.

Liabilities:

-Funds of banks and other credit institutions;

-Clients accounts, including household deposits;

– The promissory notes issued by the bank;

By using liabilities the owners of banks can leverage their capital to earn much more value than would otherwise be possible using only the bank’s capital.

Also, Central banks regulate bank liabilities by setting mandatory reserve requirements from attracted deposits or by imposing administrative restrictions or incentives.

Assets and liabilities are further distinguished as being either current or long-term. Current assets are assets expected to be sold or otherwise converted to cash within 1 year; otherwise, the assets are long-term. Current liabilities are expected to be paid within 1 year; otherwise, the liabilities are long-term. Current assets and current liabilities are important in assessing liquidity of bank. The deduction of Current assets from Current liabilities gives us a working capital. It is a measure of liquidity. An excess in Working capital a bank is able to meet its short- term liabilities

Equating Profitability With Cashflows: A Myth in Corporate Financial Performance

The issue of profit and cashflow and their respective importance in business has become an unending discussion in recent boardroom discussions. As some analyst are looking at profit history of business to assess performance, others are looking at the cash movements (i.e. cashflows). People even get more confuse when a profitable business on one hand is not able to pay its suppliers or expand whiles a non-profitable business (i.e. loss) continues to stay in business. The income statement and the cashflow statement of every business has the clue to this issue of profitability and cashflow.

Cash flow is the difference between the amount of cash a company receives and pays, whereas profitability is the difference between revenues and expenses and every company report on both their cash holdings and profitability as part of its financial reporting. Certain cash flows cannot be recorded as revenues or expenses at the time of the transactions, while other cash flows may not be part of the operating activities, and thus are not profit related.

Concept of Profitability in Business

The success of a small business depends on its ability to continually earn profits. Profit basically equals a company’s revenues minus expenses and is critical for businesses because it determines whether a company can secure external financing, attract more investors or grow its operations. A business owner must understand the importance of profitability in business management and develop strategies that give his company the best chance at remaining profitable as that is its main goal for existence among other goals.

Relevance of Profitability in Business

Profits stimulate investment and innovation and as a business undertakes more investment, it leads to generation of more employment. With generation of employment income, more demand for goods in the market will be created.

Profit is regarded necessary for business survival and growth and a business that does not make enough profit is not likely to survive in a growing competitive environment because it enables the business to grow, motivate employee, attracts investors etc.

Profit is a return on investment and every firm invest money with the expectation of higher returns on their investment. Just like shareholders expect higher returns in the form of dividend so do financial institutions expect better rate of interest on the loan given to the business enterprise.

Profit is used test the efficiency of a business and the success or otherwise of the business can be judged by the extent of profit earning capacity.

Profit serves as buffer to meet unexpected expenditures and as a business is exposed to many risk and uncertainties including changing market demands and conditions etc., profit is used to meet such unfavorable business changes.

Retained profit serves as a form of internal financing and can be used for increasing the volume of business through expansion and diversification. Any further surplus is re-invested in the business for further development.

The Concept of Cashflow

The old-age saying, “cash is king” which is usually used to explain the failure of both businesses and consumer households remains relevant in modern business because without proper amount of cash on hand, entities can run into major trouble, and even be forced into bankruptcy. Cash inflow is the lifeblood of every business and businesses need cash for various reasons including investing in new infrastructure and dealing with unexpected expenses. Moreover, a key factor in a business’s potential for long-term success is cashflow and as such a company may have all the revenue in the world, but without the ability to generate cash, it can easily fail. Without cash a business won’t run, resulting in employees becoming cranky and suppliers ceasing to supply materials even though the business may be very profitable. Sources of cashflow include receipts from customers, additions to capital, payments to suppliers etc.

Relevance of Cashflow in Business

For a company to grow, it will often need to make capital expenditure investments in areas such as factories, machinery, or technology etc which are usually a one-time cost and require significant funds, but without cash on hand, a business may not be able to make these necessary investments and, as a result, may never be able to experience company growth. Even where loans are used, the loan agreement will require a significant down payment or periodic interest payment which will in turn require that the company have access to cash.

Businesses can undertake mergers or acquisition as an expansion strategy either within their niche or to branch out into new areas but without the necessary cash, it would never be able to take that opportunity to buy a valuable company at a reasonable price. Acquisitions like these offer growth potential for many businesses.

Two key benefits of holding shares is dividends and share repurchases. Dividends puts cash in the pocket of shareholders whiles share repurchase is a management way of expressing confidence in the business growth potential via share valuation. However, without cash neither dividends nor share repurchases would be possible for a public company.

Every company experiences economic downtimes at some period in operation which could affect its sales and with cash, the company will be more flexible and able to survive the downturn but without readily available cash, it may be forced to wind up, downsize its staff or even be declared bankrupt.

Businesses like individuals also face emergencies for expenses that require immediate payment like legal fees and unexpected costs associated with natural occurrences and as most of these are not budgeted for, it means businesses must have access to the necessary cash to prepare for such emergencies, and without cash, the business may fall flat.

Businesses are expected to minimise cost and one way to do this is to reduce a lot of online transactions processing which comes with a lot of excessive fees and to use cash instead where appropriate. By paying cash, a business can reduce its online fees and ultimately cut transaction costs to the minimum with surplus cash for other productive activities.

Readily available cash helps businesses expand in the absence of loans. Many businesses have difficulty accessing loans for expansion but if it has cash available, it can position itself to take advantage of opportunities to expand and make relevant decisions.

Cash is essential for paying bills faster to avoid unnecessary penalties because paying creditors with forms other than cash can take longer to process, leading to unnecessary late fees and it makes more sense that paying in cash is the preferred method.

Are there any differences between Profitability and Cashflow? YES!

The differences between these business concepts is in recording of Non-Cash Revenue, Non-Cash Expense, Financing & Investing transactions. Companies may see increased profitability from non-cash revenues, but such an increase in profitability will have no impact on company cash holdings because companies record revenues when earned using the accrual method of accounting, despite no cash received and when cash is later collected for previously recorded revenues, increases company cash holdings but will have no impact on the profitability again. Non-cash revenue incudes accrued income, credit sales, gains and profit on disposals etc. Also, companies may see decreased profitability because of non-cash expenses, which will have no impact on company cash holdings. Companies record expenses when incurred using the accrual method of accounting, despite no cash paid and when cash payments are made later for previously recorded expenses, it decreases company cash holdings without affecting profitability.

Other differences are:

Money invested in a business, or borrowed by a business, increases cash BUT does not increase profit
Capital expenditures, such as buying a new machine, decreases cash BUT does not decrease profit
Profit accounts for overheads on accrual and prepayment basis whiles cashflows accounts for overheads when cash is paid
Cashflows reflect the details of incoming and outgoing flows of cash without using estimations of allocations and provisions like depreciation, bad debts etc. BUT profit is associated with a lot of such allocations and provisions

Conclusion

When you imagine a new business, you think of what it would cost to make the product, what you could sell it for, and what the profits per unit might be because we are trained to think of business as sales minus costs and expenses, which is profit but cash is equally critical yet people always think in profits instead of cash and interestingly we don’t spend the profits in a business, we spend cash instead.

What You Should Know Before Committing To A Secured Loan

The loan is secured by the lending company by way of ‘second charge’, which is a different regime compared to the main mortgage that holds the property on a ‘first charge’ basis. The latter is a legal arrangement in which the property securing the loan is registered with the Land Registry.

A homeowner loan obtained through this process can be used for anything the borrow wishes safe for illegal activities or purchases. However, second charge mortgages are usually restricted to funding home improvements or funding huge purchases such as car buying. Alternatively, second charge loans can be used to consolidate existing loans and help reduce the debt obligation of a struggling borrower.

With this arrangement, the borrower is expected to make regular monthly repayments throughout the life of the loan, which can run up to 25 years. The process of selling and administration of first charge secured loans is regulated by the Financial Conduct Authority (FCA) for a considerable length of time.

Today, second charge loans are now exclusively regulated by the FCA and are expected to conform to the same regulations, rules and procedures of ordinary mortgages. What this means is that borrowers will be expected to demonstrate that they can pay back both first charge ad second charge mortgages.

Who is Eligible for a Secured Second Charge Mortgage?

Do you have an existing secured loan(s) or mortgage loans that are currently running? Do you wish to borrow a huge amount of loan than what standard personal loans can provide? If your answers to the foregoing questions are the affirmative, then you are the right candidate for second charge mortgage loans. These loans can go up to £250,000 and are suitable for borrowers who have accumulated sufficient equity in their homes to guarantee the security needed for the loan.

What to Look for Before Taking Out a Second Charge Mortgage

There are numerous things that you need to know before taking a second charge mortgage loan. Here are some of the things to look out for:

By second charge, it means that any default can mean the lender taking you to court and instituting repossession procedures. When this happens, the first lender recoups his or her money back while the second lender gets thee remaining out of the sale of the repossessed home.

Second charge loans come with variable interest rates, meaning that borrowers need to exercise a lot of restraint, as the rates are likely to go up and down. If you have secured a loan that comes with variable rate, you are likely to suffer most if the rates go up, so it is important to assess your ability to pay before committing to this type of loan.

Debt is often perceived as the last option by most homeowners, but financial experts say it can prove to be the only way a borrower can get out of a financial problem in a short term. When you restructure your loan to increase the repayment period, you certainly lower the monthly repayments but increase the overall payment in the long term.

Compare thee Loans before Borrowing

After assessing your need for money (loan), you need to shop around for the best loans warehouse to understand the affordability and the conditions. You need to schedule an interview with various or selected loans agencies before you sign up. Remember that unsecured loans do not have interest rates similar to secured loan types. Unsecured loans have a maximum ceiling of up to £25,000 but this amount may vary from lender to lender and from borrower to borrower depending on the circumstances.

Make Your Decision

With a wide variety of loans available, it can be difficult to make a decision on which loan suits your needs. However, you need to evaluate your own situation based on income, need, outgoings and your credit scores. You may also need to consider if you have enough equity in your property and whether you need a long-term or short-term loan. Perhaps the most crucial question to ask is why you need the loan in the first place.