IGCSE Accounting 0452 - 6.4 Interested Parties - Banks

This section explores the role of banks as key interested parties for businesses. Understanding the relationship between a business and its bank is crucial for successful financial management.

What are Interested Parties?

Interested parties are individuals or groups who have an interest in the financial performance and stability of a business. Banks are significant interested parties because they provide crucial financial services and have a vested interest in the business's ability to repay loans and maintain financial health.

The Role of Banks for Businesses

Banks play a vital role in supporting businesses through various financial services:

• Current Accounts: Used for day-to-day transactions.
• Loan Facilities: Provide funds for investment, expansion, or working capital.
• Overdraft Facilities: Allow businesses to withdraw more money than is available in their account, up to a pre-agreed limit.
• Credit Cards: Offer a convenient way to make purchases and manage short-term cash flow.
• Investment Advice: Some banks offer advice on investment opportunities.
• Cash Management Services: Help businesses manage their cash flow efficiently.

How Banks Assess a Business

Before providing financial services, banks assess a business's financial viability. They consider several factors:

• Profitability: The business's ability to generate profit.
• Liquidity: The business's ability to meet its short-term financial obligations.
• Solvency: The business's ability to meet its long-term financial obligations.
• Credit History: The business's past record of borrowing and repaying loans.
• Industry Analysis: The overall health and prospects of the industry the business operates in.
• Management Quality: The experience and competence of the business's management team.

Types of Bank Accounts Used by Businesses

Account Type	Description	Advantages	Disadvantages
Current Account	For day-to-day transactions like receiving payments from customers and paying suppliers.	Easy access to funds, convenient for frequent transactions.	May have transaction fees.
Savings Account	For holding surplus funds and earning interest.	Earns interest on deposits, secure.	Less liquid than a current account.
Overdraft Account	Allows access to funds beyond the account balance, up to a pre-agreed limit.	Provides a safety net for unexpected expenses.	Interest charges can be high.
Loan Account	Used to borrow funds for specific purposes like investment or expansion.	Provides access to capital for growth.	Requires repayment with interest.

The Impact of Bank Interest Rates

Bank interest rates significantly impact a business's profitability. Interest rates represent the cost of borrowing money.

When a business borrows money, it has to pay interest on the loan. Higher interest rates increase the cost of borrowing, reducing profits. Lower interest rates reduce the cost of borrowing, increasing profits.

Businesses need to carefully consider interest rates when deciding whether to take out loans or overdrafts.

Relationship with the Bank

Maintaining a good relationship with the bank is essential for businesses. This includes:

• Regular communication: Keeping the bank informed about the business's financial performance.
• Meeting repayment terms: Paying loans and overdrafts on time.
• Providing accurate financial information: Ensuring financial statements are accurate and up-to-date.
• Following banking procedures: Adhering to the bank's rules and regulations.

A strong relationship with the bank can lead to better terms and conditions, such as lower interest rates and easier access to credit.