Part Three - Sources And Costs of Personal Finance

Finance and credit facilities

Most of the expenditure of the private individual is financed out of his current income - which is another way of saying that what he buys he pays for in cash out of wages or salary. But for most people there are occasions when they need to buy some major item, the price of which is more than can be found in cash at once. In order to acquire the item extra finance is needed. In this section we shall review various methods of financing expenditure other than out of current income or from money already saved up.

Buying on credit

In the wholesale trade few sales are for cash. Most take place on credit. A shopkeeper buying goods from a manufacturer will receive a bill each month or quarter for what has been delivered to him the previous month or months. He will settle this with one cheque. Where retail turnover is rapid, as with food shops, the retailer is often paid for his sales before he has himself paid for the purchases, which gives him a supply of free credit!

In former days it was also quite usual for retail domestic purchases to be made 'on credit account'. One would order groceries, meat, vegetables and so on, no payment being made at the time of delivery, the cost being entered instead on an account kept by the supplier who would send his bill at the end of the month. This would usually be paid within a few days of receiving it. Often the bill would be marked 15% discount for payment within seven days', which encouraged prompt payment.

Now that most retail purchases of food are made in supermarkets this practice has almost disappeared. It lingers on in the case of milk deliveries, where a week's credit is usually taken, and newspaper deliveries, where the credit period is usually a month. Discount for prompt payment of these small items has also been abandoned.

It will be obvious that since the shopkeeper who does not insist on cash payment needs more liquid capital to finance his trade than a cash trader will need, his total operating costs are going to be higher. His customers should expect the extra cost (interest on extra capital needed) to be passed on to them in higher prices. It is indeed quite normal to find that cash prices in 'no credit' shops are significantly lower than in the old-fashioned family grocer.

Life Assurance Exercises

A Calculate from the accounts of DEF Ltd printed on page 67 the following indicators, assuming the share price of the 50p shares to be 82p:

Yield on ordinaries Times dividend covered P/E ratio.

B You decide to buy l,000 ordinary 50p shares in the same company, DEF Ltd. If your broker quotes you 801/2p per share, what will the purchase cost you, including all charges?

... see: Life Assurance Exercises

Personal And Business Finance 2013

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