AQA GCSE Business: Finance (8132) – Revision Notes

These notes condense section 3.6 Finance of the AQA GCSE Business (8132) specification, for first teaching from September 2017: 3.6.1 sources of finance, 3.6.2 cash flow, 3.6.3 financial terms and calculations and 3.6.4 analysing the financial performance of a business. For full explanations read the study guide, then test yourself with the practice questions.

Links: AQA GCSE Business hub, checklist and the free diagnostics. All businesses and figures are invented.

Key terms

Term	Meaning
Internal finance	Money raised from within the business
External finance	Money raised from outside the business
Cash flow	Cash moving in and out over time
Net cash flow	Cash inflows minus cash outflows
Fixed costs	Do not change with output
Variable costs	Change with output
Total costs	Fixed plus variable
Revenue	Price multiplied by quantity sold
Profit / loss	Revenue minus total costs: positive is profit, negative is loss
Break-even output	Output where revenue equals total costs
Margin of safety	Actual output minus break-even output
Asset / liability	What the business owns or is owed / what it owes

Sources of finance at a glance

Internal	External
Retained profit	Family and friends, new share issue
Selling unwanted assets	Loan or mortgage, overdraft
	Trade credit, hire purchase, government grants

• Short term gap: overdraft, trade credit.
• Big, long-term purchase: loan, mortgage, share issue, hire purchase.
• No repayment: retained profit, share issue, many grants.
• Cost of borrowing: loans, overdrafts and hire purchase all cost more than the cash price or amount borrowed.
• Start-up: no retained profit, no track record, little security. Likely to use owner’s savings, family and friends, grants, or a loan with a plan to back it.
• Established: has retained profit, assets to sell, a record that lenders trust, and can offer security.

One-line trade-offs to memorise:

Source	Plus	Minus
Retained profit	No interest	Limited, needs past profit
Selling assets	Quick cash	One-off, may lose useful asset
Family and friends	Flexible	Relationship risk
Share issue	No repayment	Control and profit shared
Loan or mortgage	Large sums	Interest, security, repayment
Overdraft	Flexible	Dear, can be withdrawn
Trade credit	Delays payment	Supplier goodwill
Hire purchase	Spreads cost	Costs more overall
Grant	Often no repayment	Conditions, competition

Hire purchase reminder: total paid = deposit + (instalments x number of payments). Extra cost = total paid minus cash price. A £600 deposit plus 10 payments of £250 is £3,100 in total.

Method for “evaluate the suitability” questions:

1. Say what the money is needed for and for how long.
2. Pick one or two sources and give an advantage and a disadvantage of each, tied to the business.
3. Compare them for new or established status.
4. Reach a judgement and justify it.

Model evaluation shape: “A loan gives the large sum the kiln needs and spreads repayments (point). But interest raises costs and a young firm may struggle to provide security (counter-point). Because the equipment will last for years, a loan is better than an overdraft, provided forecast sales cover repayments (judgement).”

Cash flow

Formulas:

Net cash flow   = cash inflows - cash outflows
Closing balance = opening balance + net cash flow
Next opening    = this closing

Worked reminder (Pell Joinery): opening £2,200, inflows £9,100, outflows £10,000. Net cash flow = -£900. Closing balance = £1,300.

• Cash is not profit. Profit can exist on paper (credit sales) while cash is short. Cash can be high from a loan while the firm makes a loss.
• Problems: late payment of staff and suppliers, high-cost borrowing, loss of trust, insolvency.
• Forecasts are built to spot shortages, support loan applications and plan. They rely on estimates, so can be wrong.
• Solutions: re-schedule payments, overdraft, reduce outflow, increase inflow, find new finance. Always say what caused the problem before choosing.

Filling in a forecast table:

1. Work out net cash flow for each month (inflows minus outflows).
2. Add it to the opening balance to get the closing balance.
3. Copy that closing balance into the next month’s opening balance.
4. Work backwards if a figure is missing: inflows = closing - opening + outflows.

Interpreting a forecast: say whether the balance is positive or negative, which months are weakest, why that matters (wages, suppliers), and one sensible action. A low but positive balance is still a risk if a customer pays late.

Solution	Best when
Re-schedule payments	Suppliers are flexible and the gap is short
Overdraft	The shortage is temporary
Reduce outflow	Costs are too high all year
Increase inflow	Customers pay slowly or sales are weak
New finance	The gap is large or long-term

Costs, ARR and break-even

Total costs = fixed costs + variable costs
Revenue     = selling price x quantity
Profit      = revenue - total costs

Average rate of return (standard form, as the specification gives no formula):

ARR = [(total return - cost of investment) / years] / cost of investment x 100

Worked reminder: cost £20,000, total return £29,000 over 3 years. Profit £9,000; per year £3,000; ARR = 3,000 / 20,000 x 100 = 15%. A higher ARR is better, but compare it with other projects and the cost of borrowing. Investments covered: machinery, buildings, vehicles.

Break-even chart (you read it; you do not draw it or use the formula):

Feature	How to read it
Fixed costs	Horizontal line
Total costs	Starts at fixed costs, slopes up
Revenue	Starts at zero, slopes up more steeply
Break-even	Where revenue and total costs cross
Loss area	Left of break-even
Profit area	Right of break-even
Margin of safety	Actual output minus break-even output

Worked reminder: break-even is 900 units and the firm sells 1,150. Margin of safety is 250 units.

Value of break-even analysis: shows the sales needed to survive, helps a loan application, tests price and cost changes. Limits: assumes all output sells, constant price and variable cost per unit, depends on forecasts, ignores cash timing.

Financial statements

Income statement (over a period): sales revenue, cost of sales, gross profit, expenses, net profit.

Statement of financial position (on one date, a snapshot in time): non-current assets, current assets (inventories, receivables, cash), current liabilities, non-current liabilities, net assets, and the owners’ funds (share capital and retained profit).

Gross profit = sales revenue - cost of sales
Net profit   = gross profit - expenses
Gross profit margin = gross profit / sales revenue x 100
Net profit margin   = net profit / sales revenue x 100

You are not given formulae in the exam, so memorise these.

Worked reminder (Pell Joinery): sales revenue £120,000, cost of sales £78,000, expenses £33,000.

Line	£	Margin
Gross profit	42,000	35%
Net profit	9,000	7.5%

Judging performance: compare with the same business last year, with competitors, and with what each stakeholder wants (owners: profit; lenders: ability to repay; employees: security; suppliers: prompt payment). Financial statements help managers decide and help outsiders assess the business. They cannot show quality of products, staff morale or future plans.

Must-know distinctions

• Cash vs profit.
• Internal vs external finance.
• Fixed vs variable costs.
• Gross profit vs net profit.
• Income statement (a period) vs statement of financial position (a moment).
• Asset vs liability.
• Break-even output vs margin of safety.
• Overdraft (short term, flexible) vs loan (fixed amount, set repayments).

Quick self-test

1. A firm’s break-even output is 900 units and it sells 1,150. What is its margin of safety?
2. Calculate the ARR: cost £20,000, total return £29,000 over three years.
3. Gross profit £18,000, sales revenue £90,000. Calculate the gross profit margin.
4. Net profit £4,500, sales revenue £90,000. Calculate the net profit margin.
5. Opening balance £2,200, inflows £9,100, outflows £10,000. Find the closing balance.
6. Fixed costs £3,000, variable cost £2.50 a unit, 400 units made. Find total costs.
7. State two internal sources of finance.
8. Explain why a profitable business can run out of cash.
9. Why is the statement of financial position called a snapshot?
10. Give one disadvantage of an overdraft.
11. Name two stakeholders who might read an income statement and one thing each wants to know.

Answers

1. 250 units.
2. 15%.
3. 20%.
4. 5%.
5. £1,300.
6. £3,000 + 400 x £2.50 = £4,000.
7. Retained profit; selling unwanted assets.
8. It may have sold on credit, so profit is recorded before customers pay, while it must pay suppliers and wages now.
9. It shows assets and liabilities on one date only; the position changes the next day.
10. Interest is high and the bank can withdraw it (either).
11. Any two, such as a lender wanting evidence it can repay, and an employee wanting evidence the job is secure.

Where marks are usually lost

• Calling a closing balance “profit”.
• Not carrying the closing balance forward as the next opening balance.
• Using revenue instead of the investment cost as the divisor in ARR.
• Reporting the margin of safety as money when the question asks for units.
• Reading a break-even chart at the wrong axis.
• Listing generic pros and cons of a source without linking to the case.
• Writing “evaluate” answers with no judgement.
• Confusing assets with liabilities, or non-current with current.
• Giving a percentage with no working, or forgetting the percentage sign.

Frequently asked questions

Are formulae given in the AQA GCSE Business exam? No. You are not given formulae in the AQA GCSE Business (8132) exam, so memorise the formulas for profit, profit margins, cash flow and average rate of return.

Do I need to draw a break-even chart for AQA GCSE Business? No. You need to read and interpret a break-even chart, including the break-even output and margin of safety, but you do not draw one or use the break-even formula.

How do you calculate average rate of return? Subtract the cost of the investment from the total return, divide by the number of years, then divide by the cost of the investment and multiply by 100.

Why can a profitable business run out of cash? It may sell on credit, so profit is recorded before customers pay, while it still has to pay suppliers and staff now. Cash and profit are not the same.

What is the difference between an income statement and a statement of financial position? An income statement shows revenue, costs and profit over a period of time. A statement of financial position shows assets and liabilities on one date, a snapshot in time.

Official syllabus

Aligned to AQA GCSE Business (8132), first teaching from September 2017, published by AQA: section 3.6 Finance.