Finance

What Finance covers

Finance is examined in Paper 2, Influences of marketing and finance on business activity. It covers sources of finance, cash flow and cash flow forecasts, financial calculations and average rate of return, break-even charts and margin of safety, income statements and statements of financial position and profit margins and judging financial performance.

The 6 subtopics

Each one has its own page.

• Sources of financeInternal and external finance, retained profit, selling assets, family and friends, share issues, bank loans, mortgages, overdrafts, trade credit, hire purchase and grants, and matching finance to the business.Open →
• Cash flow and cash flow forecastsCash inflows and outflows, building a cash flow forecast, net cash flow and opening and closing balances worked through examples, cash against profit, and ways to solve a cash shortage.Open →
• Financial calculations and average rate of returnRevenue, costs and profit worked through takeaway and market-stall examples, how changes in rent or unit costs affect profit, and the average rate of return calculated, compared and questioned.Open →
• Break-even charts and margin of safetyBreak-even output and how to read it from a chart, the fixed cost, total cost and revenue lines, margin of safety, and the effect of changes in costs or price on break-even.Open →
• Income statements and statements of financial positionRevenue, cost of sales, gross profit, expenses and net profit worked through a shoe shop, assets and liabilities, current and non-current items, net assets, and how the two statements differ.Open →
• Profit margins and judging financial performanceGross and net profit margins calculated for a clothing shop and a restaurant, what falling margins reveal, comparing with past years and rivals, and how shareholders, banks and suppliers read the accounts.Open →

What you need to know

Answer each one before you reveal it.

Take Finance further

The same content, four other ways.

Commonly confused

Pairs that lose marks when they are blurred together.

• Cash flow vs Profit

  Cash flow: the movement of money into and out of a business. Profit: revenue left over once all costs are deducted.

• Gross profit vs Net profit

  Gross profit: revenue minus the direct cost of goods sold. Net profit: revenue minus cost of sales and all running expenses.

• Internal finance vs External finance

  Internal finance: money raised from within the business, such as retained profit. External finance: money raised from outside the business, such as loans or grants.

Questions from this topic

Each one with the model answer underneath.

1. 1

   Why do businesses need finance?

   Model answer

   Businesses need finance to start up, to pay day-to-day costs and to grow. Finance may also be needed to survive a period of poor cash flow.

2. 2

   What is the difference between internal and external sources of finance?

   Model answer

   Internal finance comes from within the business, such as retained profit or selling assets. External finance comes from outside, such as loans, share issues and grants.

3. 3

   What is retained profit?

   Model answer

   Retained profit is profit kept in the business rather than paid out to its owners. Retained profit is cheap, as no interest is paid, but a new business has none.

4. 4

   How can selling unwanted assets raise finance?

   Model answer

   A business can sell equipment, vehicles or property it no longer needs. The sale raises cash without borrowing, but each asset can only be sold once.

5. 5

   What are the benefits and drawbacks of finance from family and friends?

   Model answer

   Family and friends may lend money cheaply and be flexible about repayment. A disagreement over the money can damage personal relationships.

6. 6

   What is a new share issue?

   Model answer

   A new share issue is the sale of additional shares in a company to raise finance. Only limited companies can issue shares.

What is inside Levo

Six ways to work the same material.

Finance revision questions

What does Finance cover in AQA GCSE Business?

6 subtopics: sources of finance, cash flow and cash flow forecasts, financial calculations and average rate of return, break-even charts and margin of safety, income statements and statements of financial position and profit margins and judging financial performance. Each one has its own page with questions and model answers.

How is Finance organised?

By the AQA 8132 specification, subtopic by subtopic, so it matches the order you are taught it in.