A* IGCSE Business Notes – Business Finance & Cash Flow Forecasts

Practice flashcards covering business finance, sources of finance, cash flow forecasts, and exam techniques for IGCSE Business.

According to the syllabus, what are the five reasons a business needs finance?

1. Start-up capital, 2. Capital for expansion / growth, 3. Replacing existing non-current assets, 4. Investing in new technology, and 5. Working capital.

What is the formula for calculating working capital?

$$Working capital = Current assets - Current liabilities$$

Why is working capital essential for a business?

It is needed to pay everyday bills such as wages, suppliers, and rent on time to avoid insolvency.

In the matching principle, what should long-term finance be used for?

Large, durable purchases typically repaid over 5–25 years, such as buying a new factory, machinery, or vehicles.

What are the four internal sources of finance?

1. Owners’ investment, 2. Retained profit, 3. Sale of unwanted assets, and 4. Better management of working capital.

What is a significant disadvantage of using owners’ investment as a source of finance?

Owner's personal savings are usually limited and it increases the owner's personal financial risk.

Which external source of finance allows a business to withdraw more money than its current account holds?

Bank overdraft.

What is the key difference between leasing and hire purchase?

In leasing the business never owns the asset, whereas in hire purchase ownership passes to the business once all instalments are paid.

What constitutes 'share capital' as a source of finance?

Money raised by a limited company selling new shares to investors, who then become part-owners.

What are the seven factors to consider when choosing a source of finance?

1. Size of business, 2. Legal form of business, 3. Amount required, 4. Length of time needed, 5. Existing loans, 6. Cost, and 7. Purpose.

What is a cash flow forecast?

A prediction of the cash a business expects to receive and pay out over a future period (usually month by month).

What is the formula for calculating net cash flow?

$$Net cash flow = Cash inflow - Cash outflow$$

What is the formula for the closing balance in a cash flow forecast?

$$Closing balance = Opening balance + Net cash flow$$

What are the four syllabus-identified ways to solve a short-term cash flow problem?

1. Arrange/use a bank overdraft, 2. Delay paying suppliers, 3. Ask customers to pay more quickly, and 4. Delay purchase of non-current assets.

Define the term 'insolvency'.

When a business cannot pay its debts as they fall due.

How do examiners distinguish between Paper 1 and Paper 2 assessment objectives?

Paper 1 leans on AO1 knowledge ($40\%$) while Paper 2 leans more on AO3 analysis and AO4 evaluation ($40\%$ combined).

What does the command word 'Calculate' require in an exam answer?

Work out from given facts, figures or information; ALWAYS show working and include units/currency.

Explain the consequence of mismatching finance, such as using an overdraft to fund a factory.

Overdrafts can be recalled at short notice and are more expensive long-term, risking a cash crisis before the asset pays for itself.

What is one risk associated with 'venture capital' as an external source of finance?

Investors usually demand a significant share of ownership and a say in business decisions.

Why might a profitable business still suffer from a cash shortage?

Sales may have been made on credit (customers haven’t paid yet) or the business may have recently spent heavily on inventory or equipment.