3.6 Finance

Students should understand the interdependent nature of business operations, human resources, marketing and finance. Students should be able to give examples of how business objectives would be split into functional plans with clear links throughout.

The purpose of the finance function, its role within business and how it influences business activity.

3.6.1 Sources of finance

Content

Additional information

  • Methods businesses use to raise finance
  • Appropriateness of sources of finance
Students should be able to:
  • understand the main internal and external sources of finance available (including family and friends, retained profit, a new share issue, obtaining a loan or mortgage, selling unwanted assets, overdrafts, trade credit, hire purchase and government grants)
  • analyse the advantages and disadvantages of each method for a given situation
  • evaluate the suitability of sources of finance for new and established businesses.

3.6.2 Cash flow

Content

Additional information

  • Importance of cash to businesses
  • Interpreting cash flow forecasts
  • Difference between cash and profit
Students should be able to:
  • understand the consequences of cash flow problems and the effect of positive cash flow
  • understand how and why cash flow forecasts are constructed
  • complete and interpret sections of a cash flow forecast (this includes an understanding of cash inflows and outflows, net cash flow and the opening and closing balance. Students are not expected to be able to construct an entire cash flow forecast)
  • evaluate possible solutions to cash flow problems, including re-scheduling payments, overdrafts, reducing cash outflow, increasing cash inflow and finding new sources of finance.

3.6.3 Financial terms and calculations

Content

Additional information

  • Basic financial terms
  • Basic financial calculations
  • Average rate of return
  • Break-even
Students should be able to:
  • understand the difference between variable costs, fixed costs and total costs
  • understand the concept of revenue, costs, profit and loss
  • understand the main investment projects that businesses undertake, including investment in new machinery, buildings and vehicles and be able to calculate the average rate of return for these projects
  • understand the meaning of the term break-even output and interpret break-even charts
  • identify the break-even level of output and margin of safety from a break-even chart
  • evaluate the value of using break-even analysis to a business.

Students will not be expected to draw break-even charts or use the break-even formula.

3.6.4 Analysing the financial performance of a business

Content

Additional information

  • Purpose of financial statements
  • Components of financial statements
  • Interpretation of data given on financial statements

Students should be able to:

  • understand the importance of financial statements for assessing business performance and helping make business decisions
  • identify the main components of the income statement and the statement of financial position
  • understand the difference between assets and liabilities and that the statement of financial position is a snapshot in time
  • make judgements on the performance of a business through the interpretation of the information contained in income statements
  • consider current performance, performance against previous years, performance against competitors and performance from the perspective of a range of stakeholders
  • calculate gross profit margin and net profit margin to help assess financial performance.

Students will not be given formulae in an exam.