CIE As Level Business | 5.1 Business Finance - Finance & Accounting

Why do businesses need finance?

1. Start-up capital

2. Working capital

3. Finance for growth / expansion

Start-up Capital

The *premises*, *machinery*, *inventories*, etc. that a new business requires.

Short-term Finance

Money required for short periods of time of up to one year.

Long-term finance

Money required for more than one year.

What are the financial reasons for business failure?

1. *Lack of cash flow*

—> A business may be profitable but if customers delay payments / unexpected bills arise, the business may not have enough to pay suppliers / wages.

2. *Poor financial planning*

—> No accurate forecast / budget = may overspend or run out of money.

3. *Too much borrowing*

—> Relying on loans / overdrafts increases pressure to repay + interest adds to costs.

4. *Low sales revenue*

—> Risky if demand is seasonal, falls unexpectedly or pricing is too low.

5. *Overtrading*

—> When business grows too quickly w/o enough capital to support its expansion.

Administration

When *administrators* manage a business that is unable to pay its *debts* with the intention of selling it as a *going concern*.

Going concern

A business will *continue to operate* for the *foreseeable future* — typically defined as at least the next *12 months*.

Bankruptcy

The legal procedure for *liquidating* a business or property owned by a *sole trader*, which cannot fully pay its debts.

Working capital

The finance needed by all businesses to pay for *everyday expenses*, such as *wages, electricity* and buying *inventory*.

Formula for *working capital*

Current Assets - Current Liabilities

Current assets

Assets that either are cash or likely to be turned into cash within 12 months.

Current liabilities

Debts that usually have to be paid within 1 year.

Capital expenditure

The purchase of non-current assets that are expected to last for more than one year, such as buildings and machinery.

Revenue expenditure

Spending on all costs and assets other than non-current assets, which includes wages, salaries and inventory of materials.

Overheads

What it costs to run the business, including rent, insurance and utilities. These cannot be directly linked to output.

Trade receivables

Money owed to a business by its customers for goods or services already delivered but not yet paid for.

Trade payables

Money a business owes to its suppliers for goods or services received but not yet paid for.

What are the ways to manage *trade receivables* effectively?

- *Set clear payment terms* (e.g. 30 days) to avoid long delays in receiving money.

- *Send invoices promptly* and follow up on late payments with reminders.

- *Offer early payment incentives* such as small discounts to encourage customers to pay faster.

- *Check customer creditworthiness* before offering credit, especially to new buyers.

- *Limit credit to high-risk customers* or require deposits upfront.

What are the ways to manage *trade payables* effectively?

- *Take full advantage of credit periods* without paying late or damaging relationships.

- *Avoid paying too early* unless there's a benefit like a discount for early payment.

- *Maintain good relationships with suppliers* to possibly negotiate longer payment terms.

- *Track upcoming payments* to avoid missed deadlines and late payment fees.