Why businesses need finance, and finding it inside Edexcel International GCSE Business revision
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In plain words
A business needs money before it earns any: to buy equipment, rent premises and fill the shelves. Later it needs more to pay the bills while waiting for customers to pay, and to grow.
The first place to look for it is inside the business itself.
5 things to know
- Reasons for needing finance: start-up capital, working capital for day-to-day running (wages, suppliers), and capital for expansion.
- Short-term finance is needed for up to a year, usually to cover day-to-day costs. Long-term finance is for more than a year, usually to buy assets or to expand.
- Internal sources come from within the business: retained profit, the sale of assets it no longer needs, and the owners' own savings.
- Internal finance has no interest to pay and does not have to be repaid, and the owners keep control.
- But the amounts are limited: a new business has no retained profit, and an asset can be sold only once.
Tips and tricks
- Match the time: a short-term need gets short-term finance, a long-term need gets long-term finance. Buying a factory on an overdraft would be a serious mistake.
- Retained profit is profit kept in the business after tax and dividends. It is the commonest source of finance for an established firm.
It lands in your notebook with its questions as flashcards.
Why businesses need finance, and finding it inside: 5 questions and answers
These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.
Which is an internal source of finance?
It comes from within the business.
Which need is short-term?
It is a day-to-day cost that will be covered within months.
Which is an advantage of internal finance?
The money already belongs to the business.
What is working capital used for?
It keeps the business running from day to day.
Which is a disadvantage of selling assets to raise finance?
Once sold, it cannot earn for the business again.
Quiz
5 questions
Tap an answer and you’ll see straight away whether it’s right, and why.
Worksheet
3 questions, 8 marks. Write your answers on paper, then check them.
Why businesses need finance, and finding it inside
Edexcel International GCSE Business 4BS1 · 8 marks · papermunch.org
Name ______________________________ Date ______________
State two reasons why a business needs finance.[2]
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Any two of: to start up, to pay day-to-day costs (working capital), to expand.
Explain two advantages of using retained profit to pay for new machinery.[3]
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There is no interest to pay, so it is cheaper than a loan. It does not have to be repaid, and no new owners are brought in, so the present owners keep control.
Explain why a newly started business cannot rely on internal sources of finance.[3]
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It has not yet made any profit to retain, and it has few assets it could sell. The only internal source is the owner's savings, which are usually limited.
Answers: Why businesses need finance, and finding it inside
- 1. Any two of: to start up, to pay day-to-day costs (working capital), to expand.
- 2. There is no interest to pay, so it is cheaper than a loan. It does not have to be repaid, and no new owners are brought in, so the present owners keep control.
- 3. It has not yet made any profit to retain, and it has few assets it could sell. The only internal source is the owner's savings, which are usually limited.