Finance - IGCSE edexcel business studies summary notes

Borja Jimenez
Business IGCSE revision



CHAPTER 3
BUSINESS FINANCE




CONTENTS
CHAPTER 3.............................................................................................................................. 1
SOURCES OF FINANCE (25).................................................................................................. 1
CASH FLOW FORECASTING (26)........................................................................................... 4
COSTS (27).......................................................................................................................... 5
BREAK-EVEN ANALYSIS (28)................................................................................................. 5
STATEMENT OF COMPREHENSIVE INCOME (29)...................................................................6
STATEMENT OF FINANCIAL POSITION (SOFP) / BALANCE SHEETS (30).................................7
RATIO ANALYSIS (31)........................................................................................................... 9
USE OF FINANCIAL DOCUMENTS (32).................................................................................10


SOURCES OF FINANCE (25)
Money is needed to set up a business and keep it running. It is also needed to help a
business expand.

NEED FOR FUNDS
- Short-term needs1: The finance needed to fund day-to-day expenditure is called
short-term finance. This is usually repaid within a year.
- Long-term needs2: Businesses often raise money and take much longer than a year
to repay what is owed. Long-term finance normally comes from financial
institutions (banks…).
- Start-up capital: funds are most needed when setting up a business. This is because
a lot of resources are needed before trading can begin.
- Expansion: once businesses have been established, the owners often want to
expand. Businesses often need to raise finance to help fund their expansion plans;
expansion requires heavy expenditure. They may want to:
o Expand capacity to meet growing orders
o Develop new products
o Branch into overseas markets
o Diversify

INTERNAL SOURCES OF FINANCE
Internal finance comes from inside the business, and it can only be used once the
business is established- before the business has been established, there is no income for
the business.
- Personal savings: when the business is set up, the owners usually require to
contribute some finance.
ADV: they do not have to pay it back, they do not have to pay any type of interests
DISADV: if the business falls, their money is lost and they will no longer have access
to those savings
1
Money borrowed for one year or less
2
financial instrument with maturity exceeding one year

1

, Borja Jimenez
Business IGCSE revision

- Retained profit: this is profit that has not been returned to the owners; it is retained
by the business. This is a very cheap source of finance; there are no charges
involved (interest, dividends…). Retained profit is also a flexible source of finance.
(It can be saved in a bank account and used later)
ADV: it is cheap as there are no charges incurred (interest…)
DISADV: it cannot be returned to the shareholders and they might object to this
- Selling assets: an established business may be able to sell some unwanted assets
(machinery, land…) to raise finance.
ADV: you don’t have to pay it back, no charges incurred (interest…)
DISADV: if you need the items / assets in the future, you will no longer have access to
it

EXTERNAL SOURCES OF FINANCE
External finance comes from outside the business.
Short-term sources (money is borrowed for less than a year):
- Bank overdraft3: this means a business can spend more money that they have on
their account. (they go overdrawn). The bank will set an overdraft limit and
interests are only charged when the account is overdrawn.
ADV: they are simple and flexible
DISADV: of the bank thinks you are struggling, then they might ask you to pay
without much further notice and you may have some interests
- Trade payables: businesses often buy resources and pay them at a later date. This
means that a business holds on to its cash for longer
ADV: easy to set up and cheap method of raising finance
DISADV: you can normally get discounts for early payment. Delaying payment can
sometimes upset suppliers.
- Credit cards: these are convenient, flexible and avoid interest charges if
accounts are settled within the credit period. However, interest rates are usually
very high if accounts are not settled within the credit period (usually 56 days).
ADV: convenient, flexible and helps to avoid interest payments if payed on time
DISADV: interest rates can be very high especially if it takes you a long time to pay
back

Long-term sources of finance (money borrowed, and repaid at a later date than a year):
- Loan capital: this is a fixed agreement between businesses and banks. The
amounts borrowed and interest must be repaid in regular instalments over a
fixed period.
ADV: the business known exactly how much they need to pay each month
DISADV: interests have to be paid
- Mortgage4: this is a long-term loan, where the borrower must use land or property
as security; if the borrower fails to make the payments, the lender can reposess the
property
ADV: interest rates and repayments tend o be lower as it is over a longer period of
time (usually 25 years)
DISADV: if you cannot make the payment your property will be repossessed
- Unsecured bank loans: this means that banks lend money without the security of
having a claim on your assets if you fail to pay back. These present too much of a
risk for banks.
ADV: you don’t need to provide collateral
DISADV: businesses find it very difficult to get an unsecured bank loan (they present
too much of a risk for banks). Interest rates are also much higher compared to
secured loans

3
Agreement with a bank where a business spends more money they have on their account (up to an agreed limit)
4
Long-term loan secured with property


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