Business Studies
Revision Booklet
Theme 2
,Why do firms need finance? –
Buy equipment.
Buy raw materials.
Obtain a premises.
Capital expenditure = spending on items that can be reused (e.g. a company vehicle or premises).
Revenue Expenditure = payments for goods or services that have already been consumer or will be very soon (e.g. raw materials
or wages).
Internal Methods of Finance –
Owners’ capital = money invested by owner – shows the stake they have in the business (e.g. inheritance or
savings).
Retained Profit = profit carried over from the previous year usually invested back into the business (e.g. bring
in new staff or introduce new stock lines).
Sales of assets = raise finance by selling items they already own (not guaranteed money as they are not
guaranteed to sell) (e.g. machinery, land, or vehicles).
Sale and leaseback = businesses may need to raise finance but still need the use on assets, so they sell it off
buy lease it back from the buyer.
Internal finance = money sourced from within the business
+ = no interest rates, instant availability, easy access, no admin costs, good credit history, get the item back (sale/leaseback) and
received lump sum of capital
- = no contingency fund, no expansion money, can be wasted, no longer have assets, monthly outgoings increase
(sale/leaseback), no inflationary benefits, not tax deductible and limited funds raised (selling off used goods, likely to lose money
on newly brought assets (e.g. new machinery)).
Contingency fund = a plan designed to take account of a possible future event or circumstance. – back up plan money.
External finance = money generated from sources outside the business – can be very difficult to gain due to no trade or credit
history meaning borrower is potential risk to lender.
Secured Loan = collateral secured against borrowers’ assets/something they own – so lender can recoup the money borrowed
back if borrower can’t may it back (e.g. mortgage)
Unsecured Loan = no collateral – not secured against an owner’s asset, better for the borrow but can mean higher interest
rates.
Capital Gain = profit made from selling a share for more than it was purchased for.
External Methods of Finance –
Loans = money borrowed from banks, building societies and retailers – have to pay interest. Can be secured
(better for lender as collateral held against loan) or unsecured (better for borrower – but interest rates can be
higher). Debentures = agreement between lender and borrow which is registered at company’s house and lodged
against company assets – typically used by a bank for security of their loans.
Share Capital = Shareholders investing their own capital in the hope for greater return. Public limited company
(anyone can buy shares)/Private limited company (shareholders are invited. Preference shares = right to fixed
amount of dividend every year – you get priority over other shareholder types. Ordinary shares = rank after the
preference shares in regard to dividend payment and return of capital invested, carry voting rights (1 vote per
share). Deferred share = does not receive a dividend until all other classes have received minimum dividend.
Bank Overdraft = Agreed amount you can go over your balance – still has to be paid back – high interest rate –
it is a short-term flexibility source of funding. Occurs when money withdrawn casing balance to go below 0.
Leasing = renting out an asset – owner pays the upkeep. Lease is a contract outlining terms under which one
party agrees to rent property owned by another party. – Hire Purchase = renting then giving an option to fully
buy.
Trade Credit = Type of commercial financing in which customer is allowed to purchase good/service and pay at
a later date – usually no interest buy prices can inflate.
Grants = money given out by the government which doesn’t have to be paid back. – Awarded to a business
to assist n its development – usually for a specific purpose (e.g. energy, environment, exports or innovation).
Family and Friends = Money borrowed from family and friends – sometimes no interest (depends on
relationship) – this may be for interest, share of profits or interest free. Advantages = maybe no interest – pay back
when you can. Disadvantages = ruin relationships. Do not lose equity (remain in control).
, Other types of unsecured loan = Types of loans without going through a bank = Student loans, payday
loans (short-term borrowing) and debt factoring (sell of the customers debt to a 3rd party and you recoup some
money, and they do the chasing).
Peer to Peer Lending (P2PL) = good for both borrowers and lenders – p2pl websites are financial
matchmaking marrying up people who have cash to lend and people who are looking to borrow – banking
middleman cut out – investors put their cash up for lending getting higher interest rates that they could from a
savings account – borrowers pay less than a conventional loan – middleman usually charges fee - borrowers are
usually cherry picked (must have good credit score).
Crowd Funding = investment into business venture - product pitched on a website and people can choose to
invest or donate – the crowd funding site takes a % of the donations. – investment can only go ahead if full amount
is raised – investment given 14 day cooling off period in case they change their mind.
Must Know: money use, how much is being raised, what is the share offered (what you get back) and how
long the pitch is open.
Risks: business could go bust, returns not guaranteed, hard to sell shares and crowdfunding platform may go bust.
Venture Capitalists = investment into a high growth business – big investment = big reward – professional
investors – money = motivation – control bits of the business.
Business Angles = people who invest their own money into a business for a % of the profit – just give advice
they do not run it – induvial investors – mentor if needed – small business – pleasure = motivation.
Differences between Venture Captialst and Business Angle –
Amount invested.
Business angles join at the early stages.
Venture capitalists have a say on how the business is run.
Motivation differs – money vs pleasure.
Output = number of goods produced and sold.
Contribution = Amount left over after variable costs have been taken away from revenue and contributes to profit and fixed
costs.
Break even = total revenue amount is equal to the sum of total costs.
Break even chart = shows the sufficient level of output required in order to break even (how many units need to be sold until
revenue = costs).
Break even output = output a business needs to produce so total revenue = total costs.
Break even charts show: -
Total costs = money out
Total revenue = money in
Fixed Costs = stable costs that do not change with output
Level of output needed to break even = revenue = costs
Profit at a particular level of output = matches output level up with profits
Profit at particular level of output = total sales – total costs
Total sales = output x selling price
Total costs = fixed costs + (variable cost per unit x output)
Loss at a particular level = shows the results of revenue not equalling costs
Loss at particular level of output = (output x selling price) – (fixed costs + output x variable cost per unit)
Profit = Total Sales – Total costs
Revision Booklet
Theme 2
,Why do firms need finance? –
Buy equipment.
Buy raw materials.
Obtain a premises.
Capital expenditure = spending on items that can be reused (e.g. a company vehicle or premises).
Revenue Expenditure = payments for goods or services that have already been consumer or will be very soon (e.g. raw materials
or wages).
Internal Methods of Finance –
Owners’ capital = money invested by owner – shows the stake they have in the business (e.g. inheritance or
savings).
Retained Profit = profit carried over from the previous year usually invested back into the business (e.g. bring
in new staff or introduce new stock lines).
Sales of assets = raise finance by selling items they already own (not guaranteed money as they are not
guaranteed to sell) (e.g. machinery, land, or vehicles).
Sale and leaseback = businesses may need to raise finance but still need the use on assets, so they sell it off
buy lease it back from the buyer.
Internal finance = money sourced from within the business
+ = no interest rates, instant availability, easy access, no admin costs, good credit history, get the item back (sale/leaseback) and
received lump sum of capital
- = no contingency fund, no expansion money, can be wasted, no longer have assets, monthly outgoings increase
(sale/leaseback), no inflationary benefits, not tax deductible and limited funds raised (selling off used goods, likely to lose money
on newly brought assets (e.g. new machinery)).
Contingency fund = a plan designed to take account of a possible future event or circumstance. – back up plan money.
External finance = money generated from sources outside the business – can be very difficult to gain due to no trade or credit
history meaning borrower is potential risk to lender.
Secured Loan = collateral secured against borrowers’ assets/something they own – so lender can recoup the money borrowed
back if borrower can’t may it back (e.g. mortgage)
Unsecured Loan = no collateral – not secured against an owner’s asset, better for the borrow but can mean higher interest
rates.
Capital Gain = profit made from selling a share for more than it was purchased for.
External Methods of Finance –
Loans = money borrowed from banks, building societies and retailers – have to pay interest. Can be secured
(better for lender as collateral held against loan) or unsecured (better for borrower – but interest rates can be
higher). Debentures = agreement between lender and borrow which is registered at company’s house and lodged
against company assets – typically used by a bank for security of their loans.
Share Capital = Shareholders investing their own capital in the hope for greater return. Public limited company
(anyone can buy shares)/Private limited company (shareholders are invited. Preference shares = right to fixed
amount of dividend every year – you get priority over other shareholder types. Ordinary shares = rank after the
preference shares in regard to dividend payment and return of capital invested, carry voting rights (1 vote per
share). Deferred share = does not receive a dividend until all other classes have received minimum dividend.
Bank Overdraft = Agreed amount you can go over your balance – still has to be paid back – high interest rate –
it is a short-term flexibility source of funding. Occurs when money withdrawn casing balance to go below 0.
Leasing = renting out an asset – owner pays the upkeep. Lease is a contract outlining terms under which one
party agrees to rent property owned by another party. – Hire Purchase = renting then giving an option to fully
buy.
Trade Credit = Type of commercial financing in which customer is allowed to purchase good/service and pay at
a later date – usually no interest buy prices can inflate.
Grants = money given out by the government which doesn’t have to be paid back. – Awarded to a business
to assist n its development – usually for a specific purpose (e.g. energy, environment, exports or innovation).
Family and Friends = Money borrowed from family and friends – sometimes no interest (depends on
relationship) – this may be for interest, share of profits or interest free. Advantages = maybe no interest – pay back
when you can. Disadvantages = ruin relationships. Do not lose equity (remain in control).
, Other types of unsecured loan = Types of loans without going through a bank = Student loans, payday
loans (short-term borrowing) and debt factoring (sell of the customers debt to a 3rd party and you recoup some
money, and they do the chasing).
Peer to Peer Lending (P2PL) = good for both borrowers and lenders – p2pl websites are financial
matchmaking marrying up people who have cash to lend and people who are looking to borrow – banking
middleman cut out – investors put their cash up for lending getting higher interest rates that they could from a
savings account – borrowers pay less than a conventional loan – middleman usually charges fee - borrowers are
usually cherry picked (must have good credit score).
Crowd Funding = investment into business venture - product pitched on a website and people can choose to
invest or donate – the crowd funding site takes a % of the donations. – investment can only go ahead if full amount
is raised – investment given 14 day cooling off period in case they change their mind.
Must Know: money use, how much is being raised, what is the share offered (what you get back) and how
long the pitch is open.
Risks: business could go bust, returns not guaranteed, hard to sell shares and crowdfunding platform may go bust.
Venture Capitalists = investment into a high growth business – big investment = big reward – professional
investors – money = motivation – control bits of the business.
Business Angles = people who invest their own money into a business for a % of the profit – just give advice
they do not run it – induvial investors – mentor if needed – small business – pleasure = motivation.
Differences between Venture Captialst and Business Angle –
Amount invested.
Business angles join at the early stages.
Venture capitalists have a say on how the business is run.
Motivation differs – money vs pleasure.
Output = number of goods produced and sold.
Contribution = Amount left over after variable costs have been taken away from revenue and contributes to profit and fixed
costs.
Break even = total revenue amount is equal to the sum of total costs.
Break even chart = shows the sufficient level of output required in order to break even (how many units need to be sold until
revenue = costs).
Break even output = output a business needs to produce so total revenue = total costs.
Break even charts show: -
Total costs = money out
Total revenue = money in
Fixed Costs = stable costs that do not change with output
Level of output needed to break even = revenue = costs
Profit at a particular level of output = matches output level up with profits
Profit at particular level of output = total sales – total costs
Total sales = output x selling price
Total costs = fixed costs + (variable cost per unit x output)
Loss at a particular level = shows the results of revenue not equalling costs
Loss at particular level of output = (output x selling price) – (fixed costs + output x variable cost per unit)
Profit = Total Sales – Total costs
