Every business needs finance at different stages. The Cambridge IGCSE Business Studies (0450) syllabus expects you to understand why finance is required, the range of internal and external sources available, and how to evaluate the most appropriate source for a particular situation.
A cash‑flow forecast shows the expected inflows and outflows over a period (usually 12 months). It helps identify potential short‑term shortfalls and the need for short‑term finance.
| Month | Opening cash balance | Cash inflows | Cash outflows | Closing cash balance |
|---|---|---|---|---|
| Jan | £10 000 | £15 000 | £12 000 | £13 000 |
| Feb | £13 000 | £14 000 | £16 000 | £11 000 |
| … | … | … | … | … |
Interpretation tip (AO4): If the closing balance falls below the minimum cash reserve the business needs a short‑term source (e.g., overdraft or trade credit).
Students must be able to read a simple income statement and statement of financial position.
| Revenue (sales) | £… |
| Cost of sales | £… |
| Gross profit | £… |
| Operating expenses (admin, marketing) | £… |
| Operating profit | £… |
| Interest expense | £… |
| Profit before tax | £… |
| Tax | £… |
| Net profit | £… |
| Assets | |
| Current assets (cash, stock, debtors) | £… |
| Non‑current assets (plant, equipment, goodwill) | £… |
| Total assets | £… |
| Liabilities & Equity | |
| Current liabilities (payables, short‑term loans) | £… |
| Non‑current liabilities (long‑term loans, debentures) | £… |
| Share capital & reserves | £… |
| Retained earnings | £… |
| Total liabilities & equity | £… |
AO3 tip: Compare the total assets with the total liabilities + equity to check that the balance sheet balances.
| Ratio | Formula | Interpretation (one‑sentence guide) |
|---|---|---|
| Gross profit margin | Gross profit ÷ Revenue × 100% | Shows how efficiently a business turns sales into gross profit; higher is better. |
| Net profit margin | Net profit ÷ Revenue × 100% | Indicates overall profitability after all costs; useful for comparing with competitors. |
| Return on capital employed (ROCE) | Operating profit ÷ (Equity + Long‑term debt) × 100% | Measures how well capital is used to generate earnings; higher ROCE signals efficient use of finance. |
| Current ratio | Current assets ÷ Current liabilities | Assesses short‑term solvency; a ratio ≥ 1.5 is generally considered safe. |
| Acid‑test (quick) ratio | (Current assets – Stock) ÷ Current liabilities | More stringent test of liquidity because stock may not be quickly convertible. |
Money generated within the business without borrowing from external parties. Usually low‑cost, but the amount available can be limited.
| Source | Typical Use (short‑/long‑term) | Key Advantages | Key Disadvantages |
|---|---|---|---|
| Retained earnings (profit reinvestment) | Both | • No interest or repayment • No dilution of ownership |
• Reduces dividends payable to shareholders • May be insufficient for large projects |
| Sale of surplus / unused assets | Short‑term (quick cash) | • Generates cash immediately • Improves asset efficiency |
• One‑off – not a sustainable source • Reduces future resale value or production capacity |
| Working‑capital optimisation (e.g., reducing stock, speeding up receivables) | Short‑term | • Frees cash tied up in inventory or debtors • No external borrowing required |
• Risk of stock‑outs or strained customer relationships • May need investment in better inventory systems |
| Owner’s personal savings / capital contribution (sole trader or partnership) | Both | • Immediate availability • No formal interest or fees |
• Reduces the owner’s personal safety net • Limited to the owner’s wealth |
| Family & friends (informal loan or equity) | Both | • Flexible terms • Low or no interest |
• May strain personal relationships • Usually small amounts |
A small bakery wants to replace an old oven costing £12 000. It has £5 000 of retained earnings and can sell a disused delivery van for £4 000. Which internal source(s) should it use and why? Discuss cost, control and risk.
Funds obtained from outside the business, usually repayable within 12 months. They provide quick cash but often carry higher interest or affect supplier relationships.
| Source | Typical Use | Key Advantages | Key Disadvantages |
|---|---|---|---|
| Trade credit (supplier credit) | Purchasing stock or raw materials | • No cash interest • Often interest‑free for a set period |
• Supplier may withdraw credit if payments are late • May affect future terms |
| Bank overdraft | Covering temporary cash shortages | • Highly flexible – use only what is needed • Interest charged only on the amount drawn |
• Higher interest than term loans • Can be cancelled on short notice |
| Bank short‑term loan / revolving credit facility | Financing working capital or seasonal peaks | • Fixed interest rate for the period • Quick access once approved |
• Requires security or personal guarantee • Must be repaid within a year |
| Factoring / invoice discounting | Improving cash flow from receivables | • Immediate cash without waiting for customers • Outsources credit control |
• Factoring fees reduce profit margin • Loss of control over customer relationships |
| Micro‑finance | Small‑scale enterprises needing modest funds | • Accessible to businesses with limited credit history • Often includes business support |
• Interest rates can be relatively high • Loan amounts are usually small |
A clothing retailer expects a £20 000 cash shortfall in March due to a large seasonal order. Evaluate two short‑term external options and recommend the most suitable one.
Funds used for assets or projects lasting more than 12 months. They provide larger sums but involve interest, dividend expectations, or dilution of ownership.
| Source | Typical Use | Key Advantages | Key Disadvantages |
|---|---|---|---|
| Bank term loan (medium/long‑term) | Purchasing plant, buildings, major equipment | • Lump sum for large projects • Fixed repayment schedule aids budgeting |
• Interest adds to cost • Usually requires collateral |
| Issue of ordinary shares (equity finance) | Expansion, R&D, acquisitions | • No interest or repayment obligation • Improves debt‑to‑equity ratio |
• Dilutes existing owners’ control • Shareholders expect dividends |
| Preference shares | Raising capital without giving voting rights | • Fixed dividend (like interest) but no voting power • Attractive to income‑seeking investors |
• Dividend must be paid before ordinary shareholders • Still a cost to the business |
| Debentures / corporate bonds | Long‑term financing for large projects | • Fixed interest rate – predictable cost • Can be issued to a wide range of investors |
• Interest payable even if profits are low • Increases overall debt level |
| Hire purchase | Acquiring equipment or vehicles | • Spreads cost over the asset’s useful life • Ownership transferred at the end |
• Total cost higher than cash purchase due to interest • Asset used as security until fully paid |
| Finance lease (or operating lease) | Accessing plant, machinery, or IT equipment | • No large upfront cash outlay • Maintenance can be included (operating lease) |
• No ownership (unless finance lease with purchase option) • Overall cost may exceed buying outright |
| Venture capital / angel investors | Start‑ups and high‑growth businesses | • Large capital plus expertise • No immediate repayment required |
• Significant loss of control and profit sharing • Investors expect high returns |
| Government grants & subsidies | Research, export promotion, regional development | • Non‑repayable – essentially free money • May improve public image |
• Competitive application process • Often tied to specific conditions or reporting |
| Crowdfunding (online platforms) | Product launches, community projects, creative ventures | • Access to many small investors • Can also serve as marketing |
• Usually limited to modest sums • Platform fees and possible equity dilution |
A tech start‑up needs £500 000 to develop a new software platform. Compare the use of venture capital with issuing ordinary shares, focusing on cost, control, risk and time to obtain.
| Aspect | Internal Sources | External Sources |
|---|---|---|
| Cost | Generally low (no interest); opportunity cost of retained earnings | Interest, fees, or profit‑sharing; short‑term rates can be high |
| Control / Ownership | Owners retain full control | May dilute ownership (shares) or impose covenants (loans) |
| Availability | Limited to profits, assets or efficiency gains | Often larger sums; can be obtained quickly (overdraft) or over time (share issue) |
| Risk | Low financial risk but may restrict growth | Higher financial risk – repayment obligations, interest burden, or loss of control |
| Time to obtain | Immediate (e.g., cash reserves) | Varies – overdraft/credit can be instant; share issues or bonds take weeks/months |
Break‑even point (BEP) shows the sales level at which total revenue equals total costs.
| Formula | Interpretation |
|---|---|
| BEP (units) = Fixed costs ÷ (Selling price per unit – Variable cost per unit) | Units that must be sold to cover all costs. |
| Margin of safety = (Actual or projected sales – BEP) ÷ Actual sales × 100% | How far sales can fall before the business makes a loss. |
AO3 tip: Use the BEP to decide whether a proposed investment (e.g., new machinery) will be financially viable.
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