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Unit 5: Finance

IGCSE business studies revision

Needs and Sources of Finance
Finance IGCSE

Why businesses need finance

Firms need finance (or capital) for a range of reasons. These include:
  1. To start up - every firm needs to pay for the initial fixed costs
  2. To cover costs - materials, rent, wages, etc
  3. To expand - new operations at home or abroad, or upgrades to working capital may be neccessary
  4. To undertake research and development - to improve product quality and bring in greater sales.

 

Types of capital expenditure

  • Fixed Capital - the amount of cash available for spending on fixed assets (land, vehicles etc)
  • Working Capital - the amount of cash available for the running of the business
  • Venture Capital - money injected by an entrpreneur interested in making a profit in return for shares

 

Sources of finance

IGCSE business studies sources of finance

Internal vs External Finance

An internal form of finance is one which is raised from within the company, whereas an external form of finance is one raised from outside the company.

Examples of internal finance:

  • Retained Profits
  • Employers Own Funds
  • Asset Selling

Examples of external finance:

  • Trade Credit
  • Venture Capital
  • Shares
  • Loans
  • Hire Purchase

You can read more about these in our revision notes (click on the store above)

IGCSE business studies finance

Factors to consider when choosing finance

There are many things to consider when deciding where to get your company's capital from. These include:

  • Amount needed - how much is needed? Can you fund it yourself? Is it worth going to a bank?
  • Time - Do you want it immediately? Can you wait? Can you pay back quickly?
  • Legal Identity - Are you a PLC or a Sole Trader?
  • Size of firm - Do you have a lot of fixed assets? Will the bank give you a large loan?
  • Current state of finances - What are your profit margins? Will investors be attracted? Will banks be keen to loan to you?
  • Existing profits - Do you make enough money not to have to rely on others?

Ultimately companies must choose the option that suits their business best.

IGCSE business studies finance

 

 


Cash Flow Forecasting
IGCSE Business Studies Cash FlowIGCSE business studies cash flow statements

Cash Flow

Cash flow is the amount of money entering and leaving a firm in a given time frame. Cash flow forecasts predict how much money will be coming in and going out. Firms need cash to purchase materials in order to create products... which generates cash, as illustrated .

cash flow igcse business studies

Cash Flow Forecasts explained

IGCSE business studies cash flow forecast

Cash Flow Statements are financial documents that show where the cash in a firm is going in and coming out. They can be made over any period of time, and even projected into teh future. The table above shows the different features of a cash flow statement. You may be asked to fill one in (to do example questions like this, please download the word document for free at the top of the sub menu)

 

Cash Flow Problems

Cash flow problems occur when cash inflows are smaller than cash outflows

Read the following article:

http://www.bbc.co.uk/news/uk-32377013

  1. Why was the company facing cash flow problems?
  2. Can you think of other reasons why a firm may have cash flow problems?
  3. What do you think the consequences of cash flow problems are?

Remember, for additional notes on this topic, see our revision guide in the store.

IGCSE business studies cash flow problems

Cash Flow Solutions

Ways to increase inflows

  • Manipulate price (down for elastic goods, up for inelastic goods)
  • Make a promotional campaign
  • Take out a loan
  • Demand debtors pay up

Ways to decrease outflows

  • Sack workers or ineffective staff
  • Cut back on expensive supplies
  • Stagger payments to creditors
IGCSE business studies cash flow solutions

 

 

Income Statements and Balance Sheets

IGCSE business studies income statementsIGCSE business studies income statementsIGCSE Business Studies Balance Sheets

Final Accounts

Final accounts are documents a firm needs to submit at the end of the year to show their overall value. It includes two documents

  1. Income Statements
  2. Balance Sheets

These will nowbe considered in turn, below. Be careful with your definitions as the example on the right shows!!

 

Profit

Why is profit important? Look at the companies listed to the right.

  • Which would you say was most successful?
  • Which one would you like to own?
  • Who else might be interested in this information?
List of Profitable Companies 2014

Company Profit in 2014 (US$)
Apple 39.5 bn
Exon $32.5 bn
Wells Fargo $23.1 bn
Microsoft $22.1 bn

Income Statements

IGCSE Business Studies Income Statements

 

Balance Sheets

Balance Sheets are the second part of Final Accounts. They are used to show the total net assets of a company. This means, its total value, including all of the things it owes, and everything it is owed. Items of worth that a company owns are called assets whilst items that a company owes other people are called liabilities.

There are different types of assets and liabilities, as explained below..

IGCSE business studies assets and liabilities

Types of Assets

  • Current Assets
    • Items of value that are used within a year
    • e.g. non-finished stock, unsold stock, cash in bank
  • Non-Current Assets
    • Items of value that are not used up in less than a year e.g. land, machinery

Types of Liabilities

  • Current Liabilities
    • Items of value that are owed to other firms or people to be paid back within a year
    • e.g. Credit card loans
  • Non-Current Liabilities
    • Items of value that are owed to other firms or people to be paid back in more than a year
    • e.g. Mortgages
IGSE Business Studies Liabilities

Balance Sheets

IGCSE business studies balance sheets

 

Analysis of Accounts

Analysing Accounts

Use the following information to calculate the:

  • Gross Profit Margin
  • Profit Margin
  • Return on Capital Employed

Use the following information to calculate the liquidity ratio for the firm at hand:

  • Calculate the Current Ratio
  • Calculate the Acid Test Ratio

For more information on how to do this, purchase our revision notes in the store, above!

  $ $
Total Sales    
Less Cost of Sales    
Gross Profit    
Less Expenses    
Pre Tax Profit    
Post Tax Profit    
Distributed Profit    
Retained Profit    

  $ $
Fixed Assets    
Current Assets    
Total Assets    
Current Liabilities    
Working Capital    
Non-Current Liabilities    
Total Liabilities    
Total Net Assets    
Shareholders funds