Welcome to the Financial Information Hub!

Hello future entrepreneurs! Finance might seem like the most complicated part of Business Studies, but don't worry. Think of finance as the way we keep score and make sure our business stays healthy. It’s the lifeblood of any enterprise!
In these notes, we will break down how businesses find money, measure success, and keep the essential records needed to make smart decisions.

Quick Review: Why do we need Financial Information?

We need financial records and information for four main reasons (6.4):

  • Decision-making: Owners use records to see what is working and what needs changing.
  • Legal and Taxation: The government needs to know how much tax the business owes.
  • Forecasting: Predicting future performance (like sales or costs) to plan ahead.
  • Stakeholders: Providing a "true and fair view" of the business's health to interested parties (like banks or investors).

1. Sources of Finance (6.1)

Where does an enterprise get the money it needs? Businesses need money for two main stages: when they start up (start-up funding) and when they continue running or want to expand (funding for continuing trade and expansion).

Sources for Start-up Funding

Start-up capital is the money needed before the business even opens its doors.

A. Internal Sources (Money from within the business or owner)
  • Personal Savings (Owners' Capital):
    Description: Money the entrepreneur already has saved.
    Advantage: No interest to pay; full control over the business.
    Disadvantage: Limited amount; if the business fails, the owner loses their personal money (high risk).
B. External Sources (Money from outside the business)
  • Family and Friends:
    Description: Loans or investments from people close to the entrepreneur.
    Advantage: Often low interest rates or flexible repayment terms.
    Disadvantage: Can cause relationship problems if the business struggles or fails.
  • Bank Overdrafts:
    Description: The bank lets the business spend more money than it actually has in its account, up to an agreed limit.
    Advantage: Very flexible, only pay interest on the amount overdrawn. Good for short-term problems.
    Disadvantage: High interest rates; can be recalled by the bank at short notice.
  • Bank Loans and Mortgages:
    Description: Fixed amounts borrowed for a specific period (loans are short/medium term; mortgages are long-term, secured on property).
    Advantage: Allows purchase of expensive assets (like machinery); easy budgeting due to fixed repayments.
    Disadvantage: Interest must be paid regardless of profit; collateral (security) may be required.
  • Grants and Subsidies:
    Description: Money given by the government or other organisations (e.g., community sources) that does not need to be repaid.
    Advantage: Free money! (No repayment required).
    Disadvantage: Often hard to get; strict rules on how the money must be used.
  • Crowdfunding:
    Description: Raising small amounts of money from a large number of people, usually online.
    Advantage: Excellent way to test market interest and raise awareness.
    Disadvantage: If the funding goal isn't met, the business usually gets nothing.
  • Selling Shares (for Limited Companies):
    Description: Selling small parts of the ownership (shares) of the company to investors.
    Advantage: Large amounts of capital can be raised; no repayment date.
    Disadvantage: Owners lose some control; must pay dividends (a share of the profit) to shareholders.

Sources for Continuing Trade and Expansion

Once the business is running, it looks for money to grow, pay unexpected bills, or replace old equipment.

  • Retained Profit:
    Description: Profit kept back in the business after all expenses and taxes are paid.
    Advantage: Completely free source of finance (no interest, no loss of control).
    Disadvantage: May not be enough for big expansion; shareholders/owners might prefer to receive this money immediately.
  • Venture Capital:
    Description: Investment from private institutions or individuals who specialise in funding high-growth, riskier enterprises.
    Advantage: Brings expertise and advice alongside the money.
    Disadvantage: The venture capitalist takes a significant share of ownership and demands high returns.
  • Issuing Shares:
    (Same process as start-up, but used specifically to fund expansion.)

Quick Takeaway: Choosing finance means balancing risk (losing control) against cost (paying interest or dividends). Internal sources are safer but usually smaller.

2. The Concept of Trade Credit (6.2)

Trade Credit is a form of short-term finance. It happens when one business allows another business to buy goods now and pay for them later, usually within 30, 60, or 90 days.

Trade Credit from the Entrepreneur's Viewpoint

When the entrepreneur buys goods from a supplier on credit, the supplier becomes a Trade Payable.

  • Advantage: The entrepreneur receives goods immediately and can sell them before having to pay the supplier. This helps with cash flow.
  • Disadvantage: If the entrepreneur misses the payment deadline, the supplier might refuse future credit or charge interest/fines.

Trade Credit from the Customer's Viewpoint

When the entrepreneur sells goods to a customer on credit, the customer becomes a Trade Receivable (sometimes called debtors).

  • Advantage (for the customer): They get the product immediately.
  • Advantage (for the entrepreneur): Offering credit might attract more business customers and increase sales.
  • Disadvantage (for the entrepreneur): There is a risk the customer might not pay (bad debt), and it ties up the entrepreneur's money while waiting for the payment.

Did you know? Trade credit is effectively a free loan for the period until payment is due, provided you pay on time!

3. Key Financial Terms and Statements (6.3 & 6.4)

To run an enterprise successfully, you need to understand three core documents: the Cash Flow Forecast, the Income Statement, and Break-Even analysis.

A. The Cash Flow Forecast

A Cash Flow Forecast looks at the money coming into and flowing out of the business over a period of time (e.g., the next 6 or 12 months). It is focused purely on physical cash movements.

Key Terms:

  • Cash Inflows: Money coming in (e.g., cash sales, money received from debtors, bank loans).
  • Cash Outflows: Money going out (e.g., paying suppliers, wages, rent, loan interest).
  • Surplus: Happens when cash inflows are greater than cash outflows.
  • Deficit: Happens when cash outflows are greater than cash inflows. This is dangerous!

Why it's important: It helps predict when the business might run out of cash, even if it is profitable on paper. A business with lots of sales (making a profit) can still fail if customers pay too slowly (a cash flow problem).

Analogy: Imagine your wallet. Your salary is an inflow. Rent and food are outflows. Cash flow tracks whether your wallet is empty at the end of the month!

B. The Income Statement (Profit and Loss Account)

The Income Statement shows whether the business has made a profit or a loss over a specific trading period (usually one year). It looks at the value of sales vs. the costs incurred.

Key Terms:

  • Revenue (Income): The total value of sales made by the enterprise over a period.
  • Expenditure: The total costs incurred by the enterprise (e.g., costs of goods sold, salaries, rent).
  • Profit: When Revenue is greater than Expenditure. Profit is the reward for the entrepreneur and owners.
  • Loss: When Expenditure is greater than Revenue.
  • Debt: Money owed by the enterprise to others (like banks or suppliers).

Important Note for Social Enterprises: Charitable or non-profit organisations do not aim to make a "profit." Instead, if their income is higher than their expenditure, they record a Surplus.

C. Break-Even Analysis

Break-even is the point where total revenue exactly equals total costs. At this point, the business is making neither a profit nor a loss.

Key Terms:

  • Fixed Costs: Costs that do not change with the level of output (e.g., rent, insurance). They must be paid even if the business sells nothing.
  • Variable Costs: Costs that change directly with the level of output (e.g., raw materials, packaging).
  • Total Cost: Fixed Costs + Variable Costs.
  • Contribution: The amount each unit sold contributes towards covering the fixed costs.
    \[\text{Contribution per unit} = \text{Selling Price per unit} - \text{Variable Cost per unit}\]

Calculating the Break-Even Point (BEP):

The BEP is the number of units you need to sell to cover all your costs.

\[\text{Break-Even Point (in units)} = \frac{\text{Total Fixed Costs}}{\text{Contribution per unit}}\]

Don't worry if this seems tricky at first! Remember the goal: every sale must contribute enough to slowly pay off the big, fixed bills (like rent). Once those bills are covered, the next sales are pure profit.

Quick Review Box: Cash Flow vs. Income Statement

Cash Flow: Tracks actual cash movements. Focuses on liquidity (ability to pay short-term bills). Can have cash problems even if profitable.
Income Statement: Tracks revenue and expenditure. Focuses on profitability (long-term success).

4. Preparing Financial Records (6.4)

Entrepreneurs must prepare basic financial records for planning and monitoring. The syllabus requires you to understand how to prepare a simple budget, a cash flow forecast, and an income statement.

A. Preparing a Simple Budget

A budget is a financial plan for the future. It sets out expected income and expected expenditure for a specific period.

Steps:

  1. Forecast expected income (e.g., sales).
  2. Forecast expected expenditure (e.g., fixed costs like rent, and variable costs like materials).
  3. Calculate the difference (expected surplus or deficit).
  4. Monitor actual performance against the budgeted figures to find variances and take corrective action.

B. Preparing a Simple Cash Flow Forecast

A cash flow forecast uses the budget information but organises it by month (or week) to check liquidity.

The Structure:

  1. Start with the Opening Balance (cash in the bank at the start of the month).
  2. Add Total Inflows (cash received).
  3. Calculate Total Cash Available (Opening Balance + Total Inflows).
  4. Subtract Total Outflows (cash paid out).
  5. The result is the Closing Balance (Total Cash Available - Total Outflows).

Trick: The Closing Balance for Month 1 automatically becomes the Opening Balance for Month 2.

C. Preparing a Simple Income Statement

The income statement follows a standard layout to calculate profitability:

Step 1: Calculate Gross Profit

  • Sales Revenue
  • Minus Cost of Goods Sold (Variable costs related directly to the product)
  • = Gross Profit

Step 2: Calculate Profit for the Year (Net Profit)

  • Gross Profit
  • Minus Operating Expenses (Fixed costs, like rent, salaries, utilities)
  • = Profit for the Year (or Net Profit)

This final figure tells the entrepreneur the true success of the enterprise over the year.

Common Mistake to Avoid: Confusing Sales Revenue (the total money earned from sales) with Profit (what's left after all costs are paid). Revenue is the top line; profit is the bottom line!

Final Key Takeaway: Financial records are essential tools, not just boring paperwork. They allow an entrepreneur to measure success, manage risks, and ensure the business has enough cash to survive and grow.