Pearson Edexcel International A Level
Business Unit 2: Managing Business
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Business plan
→ A plan for the development of a business, giving details such as the products to be made,
resources needed & forecasts such as costs, revenues & cash flow.
→ Initially, new businesses will create a plan to follow but changes in external factors will lead
to changes in business plans.
→ Business plan is a written document by the business regarding its operations.
Relevance of a Business Plan
→ A business plan is needed to support applications for finance, both at the start-up stage & in
the future. Lenders & other investors are not likely to put money into a business unless the
owners can provide a clear, concise vision of future progress & profitability.
→ In particular, investors will want to know how their money is going to be spent & when &
how they are going to benefit from their investment.
Uses of a Business Plan
1. To show a clear direction for the development of a business.
2. Help show lenders & investors that the owner is cautious, responsible, serious & credible.
3. To flag up potential problems in advance so that investors are aware & solutions can be
found. → When the business creates a business plan, they can see the potential problem in
advance & find solution. e.g., If the business decided to expand in the future, then they will
have to increase their production. The problem is the source of finance. As a result, they can
think of in advance where they will get the finance.
Contents of a Business Plan
,1. An executive summary: Usually business plan is very lengthy. So, there should be a summary
of the whole business plan included on the business plan itself.
2. The business opportunity: A description of the product/ range of products to be made, the
quantity to be sold & the estimated price.
3. Financial forecasts: It must be written in the business plan the cash outflows & inflows. e.g.,
sales forecast, cash flow forecast.
4. The business & its objectives: The name of the business, its address, its legal structure & its
aims & objectives.
5. Personnel: Who will run the business, how many employees.
6. Finance: Where the finance to start up & run the business will come from.
7. Premises & equipment: Premises to be used, equipment which needs to be obtained &
financed.
Internal Finance
Money generated by the business/its current owners.
The need for finance
→ Firms need money to get started. They might need to buy equipment, raw materials & obtain
premises.
→ However, business is a continuous activity & money flowing in may use to buy more raw
materials & settle other trading debts. If the owner wants to expand, which means larger
premises, more equipment & extra workers. A business will need to find a way of raising
finance.
Capital
The money provided by the owners in a business.
Owner's Capital
→ In most cases, a business cannot start unless the owners provide capital of their own.
Providing capital is part of the risk taken by entrepreneurs when setting up a business.
→ Owners provide capital from their own personal resources. A common source is personal
savings. Some entrepreneurs have deliberately saved up over a period of time so that they can
start their own business.
→ Personal savings would be an appropriate source of finance for a sole trader/partnership.
,Retained Profit
→ Retained profit is when dividends (profit of shareholders) are not returned to shareholders
& are reinvested into the business. If retained profit is used by the business, shareholders will
not object even they will not be receiving their dividends because if it is reinvested again in the
business then they will be receiving higher dividend/ profit in the future.
→ Retained profit is a flexible source of finance. It does not have to be used immediately. It can
be accumulated by a business in a bank account where it will earn interest. A business can then
use the retained profit at a later date. If a business does not make a profit, retained profit is not
possible as a source of finance.
Shareholders
Owners of the business.
Sale of assets
→ Asset sales can be used by all businesses, as long as they are not a start-up business (since
the business will have no assets.)
→ An established business may be able to sell some unwanted assets to raise finance. e.g.,
Machinery, land & buildings that are no longer required could be sold off for cash.
Pros of Internal Finance
→ The capital is available immediately: there is no time delay between identifying a need for
finance & obtaining it. For example, retained profit will be in a bank account ready & waiting.
→ Internal finance is cheap: there is no interest payments which means that costs will be lower
& profit higher.
Cons of Internal Finance
→ Internal finance can be limited: a business may not be sufficiently profitable to use retained
profit or may not have unwanted assets to sell. Also, the current owners may not have any
personal resources to contribute.
→ Internal finance can be inflexible compared to external sources of finance. There are a wide
variety of funding options for external finance, which can give the business flexibility.
External Finance
→ Money raised from outside the business.
→ May not always be available because business start-ups have no trading record & present too
much risk for many lenders. However, once a business has survived the initial 'uncertain' stages
of business development, external sources of finance can be an option.
, External Sources of Finance (Family & friends)
→ Common source of finance for small businesses.
→ Money might be gifted to an entrepreneur. For example, a parent might give their child a sum
of money as a present to help them get started.
Pros: Family & friends may not want a share in the business & will not be able to interfere in the
running if the business.
Cons: If the terms of the arrangement lack clearness this could lead to the loss of friendship/a
breakdown in family relations.
External Sources of Finance (Banks)
→ Some businesses can borrow their desired amount of money from bank. This borrowing of
money from the bank is called loan.
→ Banks will be involved in a business start-up because businesses need a bank account to
facilitate financial transactions with customers & suppliers.
→ A formal application is required to get finance from banks & it will probably be necessary to
provide a business plan.
→ However, borrowing from banks means the business will have to pay interest.
External Sources of Finance (Peer to Peer Lending (P2PL))
→ Involves people lending money to unrelated individuals/’peers’ & therefore avoiding the
use of a bank.
→ When a group of people form a group & raise fund to lend to other people.
→ All transactions take place online.
→ Lenders may choose which borrower to lend to.
Pros:
→ Interest rates are better for both borrowers & lenders than those offered by a bank.
→ Very convenient because it can be completed online quickly.
Cons: All loans are unsecured which means there is no protection for lenders. Therefore,
lenders might lose their money if a borrower neglect to pay back.
External Sources of Finance (Business Angels)
Business Unit 2: Managing Business
Activities-Exam Study Guide with Verified
Answers | Guaranteed Success
Business plan
→ A plan for the development of a business, giving details such as the products to be made,
resources needed & forecasts such as costs, revenues & cash flow.
→ Initially, new businesses will create a plan to follow but changes in external factors will lead
to changes in business plans.
→ Business plan is a written document by the business regarding its operations.
Relevance of a Business Plan
→ A business plan is needed to support applications for finance, both at the start-up stage & in
the future. Lenders & other investors are not likely to put money into a business unless the
owners can provide a clear, concise vision of future progress & profitability.
→ In particular, investors will want to know how their money is going to be spent & when &
how they are going to benefit from their investment.
Uses of a Business Plan
1. To show a clear direction for the development of a business.
2. Help show lenders & investors that the owner is cautious, responsible, serious & credible.
3. To flag up potential problems in advance so that investors are aware & solutions can be
found. → When the business creates a business plan, they can see the potential problem in
advance & find solution. e.g., If the business decided to expand in the future, then they will
have to increase their production. The problem is the source of finance. As a result, they can
think of in advance where they will get the finance.
Contents of a Business Plan
,1. An executive summary: Usually business plan is very lengthy. So, there should be a summary
of the whole business plan included on the business plan itself.
2. The business opportunity: A description of the product/ range of products to be made, the
quantity to be sold & the estimated price.
3. Financial forecasts: It must be written in the business plan the cash outflows & inflows. e.g.,
sales forecast, cash flow forecast.
4. The business & its objectives: The name of the business, its address, its legal structure & its
aims & objectives.
5. Personnel: Who will run the business, how many employees.
6. Finance: Where the finance to start up & run the business will come from.
7. Premises & equipment: Premises to be used, equipment which needs to be obtained &
financed.
Internal Finance
Money generated by the business/its current owners.
The need for finance
→ Firms need money to get started. They might need to buy equipment, raw materials & obtain
premises.
→ However, business is a continuous activity & money flowing in may use to buy more raw
materials & settle other trading debts. If the owner wants to expand, which means larger
premises, more equipment & extra workers. A business will need to find a way of raising
finance.
Capital
The money provided by the owners in a business.
Owner's Capital
→ In most cases, a business cannot start unless the owners provide capital of their own.
Providing capital is part of the risk taken by entrepreneurs when setting up a business.
→ Owners provide capital from their own personal resources. A common source is personal
savings. Some entrepreneurs have deliberately saved up over a period of time so that they can
start their own business.
→ Personal savings would be an appropriate source of finance for a sole trader/partnership.
,Retained Profit
→ Retained profit is when dividends (profit of shareholders) are not returned to shareholders
& are reinvested into the business. If retained profit is used by the business, shareholders will
not object even they will not be receiving their dividends because if it is reinvested again in the
business then they will be receiving higher dividend/ profit in the future.
→ Retained profit is a flexible source of finance. It does not have to be used immediately. It can
be accumulated by a business in a bank account where it will earn interest. A business can then
use the retained profit at a later date. If a business does not make a profit, retained profit is not
possible as a source of finance.
Shareholders
Owners of the business.
Sale of assets
→ Asset sales can be used by all businesses, as long as they are not a start-up business (since
the business will have no assets.)
→ An established business may be able to sell some unwanted assets to raise finance. e.g.,
Machinery, land & buildings that are no longer required could be sold off for cash.
Pros of Internal Finance
→ The capital is available immediately: there is no time delay between identifying a need for
finance & obtaining it. For example, retained profit will be in a bank account ready & waiting.
→ Internal finance is cheap: there is no interest payments which means that costs will be lower
& profit higher.
Cons of Internal Finance
→ Internal finance can be limited: a business may not be sufficiently profitable to use retained
profit or may not have unwanted assets to sell. Also, the current owners may not have any
personal resources to contribute.
→ Internal finance can be inflexible compared to external sources of finance. There are a wide
variety of funding options for external finance, which can give the business flexibility.
External Finance
→ Money raised from outside the business.
→ May not always be available because business start-ups have no trading record & present too
much risk for many lenders. However, once a business has survived the initial 'uncertain' stages
of business development, external sources of finance can be an option.
, External Sources of Finance (Family & friends)
→ Common source of finance for small businesses.
→ Money might be gifted to an entrepreneur. For example, a parent might give their child a sum
of money as a present to help them get started.
Pros: Family & friends may not want a share in the business & will not be able to interfere in the
running if the business.
Cons: If the terms of the arrangement lack clearness this could lead to the loss of friendship/a
breakdown in family relations.
External Sources of Finance (Banks)
→ Some businesses can borrow their desired amount of money from bank. This borrowing of
money from the bank is called loan.
→ Banks will be involved in a business start-up because businesses need a bank account to
facilitate financial transactions with customers & suppliers.
→ A formal application is required to get finance from banks & it will probably be necessary to
provide a business plan.
→ However, borrowing from banks means the business will have to pay interest.
External Sources of Finance (Peer to Peer Lending (P2PL))
→ Involves people lending money to unrelated individuals/’peers’ & therefore avoiding the
use of a bank.
→ When a group of people form a group & raise fund to lend to other people.
→ All transactions take place online.
→ Lenders may choose which borrower to lend to.
Pros:
→ Interest rates are better for both borrowers & lenders than those offered by a bank.
→ Very convenient because it can be completed online quickly.
Cons: All loans are unsecured which means there is no protection for lenders. Therefore,
lenders might lose their money if a borrower neglect to pay back.
External Sources of Finance (Business Angels)
