Chapter 17 Guidance to answering the practical exercises

Understanding clients: individuals and businesses

Q1. Think of a life event which has affected you? How did it impact on your finances? What were the legal implications?

Example 1 in Chapter 17 was intended to make you think about how life events impact on individuals both financially and legally. Even something as trivial as buying your first car has legal and financial implications. As an example, let’s look at the common experience of going to University.

Financial implications:

  • Financial independence. For most students, this will probably be the first time that they have had to manage their finances independently from their parents. A little knowledge of basic accounting can help here in order to understand how to manage finances and budget sensibly.
  • Debt. Most students will be relying on a student loan, and probably an overdraft from the bank. Student loans are different from bank loans. As you are undoubtedly aware, money is loaned to students by the government at a subsidised rate, and graduates repay these loans after their income hits the threshold level (unlike an ordinary loan where you are liable for the repayments, regardless of your salary). Incidentally, unlike an ordinary loan, you cannot apply to make yourself bankrupt on the basis that you cannot repay your student loan.
  • Most students will have made the decision to come to University partly on the basis that a degree can lead to greater earning potential in the future.

Legal implications:

You probably have not thought of many. However, here are a few examples.

  • Your University experience is to an extent governed by various Education Acts, in particular the Higher Education Act 2004 and amending legislation.
  • Quality. The UK Quality Assurance Code (Source: sets out what Universities are required to do and what students can expect from them.
  • Equal access to education. Equality legislation and the Quality Assurance Code are designed to ensure equal access and participation for all students to higher education.
  • Finally, don’t forget your legal personality. It has changed as a result of your decision to come to University. You may be renting a room rather than living with your parents. That creates new rights and obligations. You have the protection of the legislation mentioned above. You have the right to your student loan, but also a statutory obligation to repay it when you start earning enough. These are a few examples which show that in the same way that leaving home and becoming independent has changed your personal life, you have also taken the first steps towards your “grown up” legal personality, which is a very different legal personality than that of a child.

Q2. Calculate your wealth. What can you do to increase it?

As this entirely depends on your situation, let’s think about why you were asked this question.

  • First, go back to Chapter 17.4 and check that you understand what is meant by wealth. It doesn’t mean “being rich”. Wealth as we saw is the total of everything you have, and yours may, for now, be a negative: i.e. it could well be a series of loans (or liabilities). Technically, if your liabilities exceed your assets, you are insolvent, but as the largest debt you will have is your student loan, as we have seen in the last question, this is not something to worry about too much.
  • Clearly the easiest way to increase your wealth is to increase your income and reduce your expenses. You could do the former by getting a part-time job whilst you are studying, and the latter by cutting down on nights out, or moving to a flat with a lower rent. It’s exactly the same principle as a business increasing its profit. If you have any money left over you could put it aside in a savings account, which will give you cash in the bank (an asset) or use it to pay off your overdraft (thus reducing a liability), in the same way that businesses use retained profit to invest in assets for the business or reduce their liabilities.
  • Do not make the mistake of thinking that you could increase your wealth by selling stuff. If you sell your i-pad (an asset) you get cash (another asset) so you have swapped one asset for another, but you haven’t made any difference to your overall wealth. Accounts are at the heart of all businesses, and by answering this question, you have shown an understanding of basic accounting principles.

Q3. Find out how to check your credit rating. What can you do to improve it?

This should not have been a difficult question to answer, as a quick Google search will reveal all the information that you need, e.g. the Money Advice website ( Search for ‘How to improve your credit score’. This will tell you that there are three main credit reference agencies through which you can check your credit rating: Experian, Equifax and Callcredit. You can check your credit rating as often as you like.

Most money advisory sites offer a variety of advice on how to improve your credit rating. Here are a few of the suggestions which you could have made.

  • Get on the electoral roll;
  • Always pay bills on time, including your mobile phone bill;
  • Do not exceed overdraft limits;
  • Get a credit card and pay it off monthly;
  • Don’t ‘max out’ on your credit card; i.e. keep your borrowing low in relation to your maximum credit limit;
  • Get a telephone landline in your own name;
  • Reduce any debts which you may have;
  • Cancel any unused “historic” credit cards and bank accounts.

Some of these are straightforward common sense. Others are not so easy for students. However, from the start of your career, you should realise just how important your credit rating is, and avoid the pitfalls which can make it difficult to get credit later in life.

Q4. What are the main advantages and disadvantages of debt and equity finance?

Raising money will always be one of the main concerns of any business. At an interview, you could be asked to explain the differences between equity and debt finance. As you have seen, in order to raise finance, a business may either get a loan (debt finance) or investment (equity finance). That very simply is the answer to that question. However, some analysis will add value to your answer. The main advantages and disadvantages of both types of finance are set out in the two tables below for ease of reference. They cover most of the suggestions that you could have come up with.




The business has cash to cover costs of start-up, running the business or expansion, without incurring any debt

Investors will usually want a stake in business

No interest on loans which keeps expenses low and increases profits

Investors will want a share of the profits

Investment does not have to be repaid, even if business fails.

Owner does not have overall control

Low levels of borrowing are looked at more favourably by investors and lenders, enabling money to be raised more easily in future

Partnership profit or dividends paid to investors is not tax deductible





Lenders will not have to be given a stake in business.

The business has to make loan repayments which eat into its cash, reducing the amount which can be invested in the business

Lenders will not have to be given a share of the profits

The business has to pay interest, which increases its expenses and decreases its profit

Owner has overall control

Lender will require security over business assets

Interest is tax deductible

Loan has to be repaid, even if business is struggling, which increases the risk of insolvency.

Low interest rates give the advantage of using someone else’s money comparatively inexpensively, without the business or owner(s) having to find funds from their own resources

Owner/directors may be required to give personal guarantees, increasing the risk of personal bankruptcy.


High levels of borrowing may make it more difficult to attract investment at a later stage

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