Edexcel GCSE Business: Cash flow and sources of finance for a small business (1BS0) – Revision Notes

These notes condense Topic 1.3 Putting a business idea into practice, items 1.3.3 (cash and cash-flow) and 1.3.4 (sources of business finance), from the Pearson Edexcel Level 1/Level 2 GCSE (9-1) in Business (1BS0) specification, Issue 2, July 2022. For full explanations and worked examples read the study guide. Test yourself with the practice questions.

Links: the Business hub, the printable checklist and the free diagnostics.

1. Why cash matters (1.3.3)

Idea	What to remember
Pay suppliers	Suppliers can refuse further deliveries or demand payment up front if bills are late
Pay overheads	Rent, utilities and insurance fall due on fixed dates
Pay employees	Wages are due on the agreed day, whatever the sales that week
Prevent business failure	Running out of cash can lead to insolvency: unable to pay debts when due

Insolvency = a business cannot pay its debts when they are due. A profitable business can still become insolvent if cash arrives too late.

Cash versus profit

	Cash	Profit
Meaning	Money actually received or paid	Sales revenue minus costs
Timing	When money changes hands	When the sale is made or cost incurred
Can a business have one without the other?	Yes: cash-rich but loss-making, or profitable but cash-poor	Yes

Typical causes of profit without cash: customers given time to pay, large stock bought up front, big equipment purchases, loan repayments. Typical causes of cash without profit: a loan received, a customer deposit, the owner adding money.

2. Cash-flow forecast: terms and formulae

The specification gives these in Appendix 3. Formulae are not provided in the examinations.

Term	Rule
Cash inflows	Money coming in: sales receipts, loan received, owner’s money
Cash outflows	Money going out: materials, wages, rent, utilities, equipment, loan repayments
Net cash flow	Cash inflows - cash outflows, for the period being forecast
Opening balance	Closing balance of the previous period
Closing balance	Opening balance + net cash flow

Appendix 2 also lists cash-flow forecasts including total costs, total revenue and net cash flow among the quantitative skills.

Method: completing a forecast

1. Add the inflows in each month to get total inflows.
2. Add the outflows in each month to get total outflows.
3. Net cash flow = total inflows - total outflows.
4. The first opening balance is given. Every later opening balance = the previous closing balance.
5. Closing balance = opening balance + net cash flow.
6. Test your final answer: start from the first opening balance and add every net cash flow in turn.

Worked reminder: a three-month forecast

Opening balance in the first month is £1,200.

	Month 1	Month 2	Month 3
Total inflows	4,300	3,900	5,100
Total outflows	4,800	4,600	4,200
Net cash flow	-500	-700	900
Opening balance	1,200	700	0
Closing balance	700	0	900

Check: 1,200 + (-500) + (-700) + 900 = 900. The balance touches £0 at the end of month 2, so any small shortfall would mean the business cannot pay a bill. A real owner would act before then.

Reading a forecast

• A falling closing balance is a warning even if it is still positive.
• A negative closing balance forecasts a cash shortage that needs financing or a change of plan.
• Find the cause: a one-off purchase, a seasonal dip, or weak trading.
• A forecast uses estimates, so it can be wrong. Sales may fall short and customers may pay late.
• Possible actions: arrange an overdraft, ask customers to pay sooner, seek longer supplier credit, delay a purchase, or cut costs.

3. Sources of finance (1.3.4)

The specification sorts the sources as follows.

Term	Source
Short-term	Overdraft, trade credit
Long-term	Personal savings, venture capital, share capital, loans, retained profit, crowd funding

Short-term sources

Source	What it is	Advantage	Disadvantage
Overdraft	Bank lets the account go below zero up to an agreed limit	Flexible: borrow only what is needed	Interest can be high and the limit may be cut
Trade credit	Supplier delivers now, business pays later	No interest in the usual arrangement; stock sold before it is paid for	May not be offered to new businesses; discounts for early payment are lost

Long-term sources

Source	What it is	Advantage	Disadvantage
Personal savings	Owner’s own money	No interest and no outsiders	Limited sum; owner can lose it
Venture capital	Investor funds the business for a share and often a say	Large sums, no monthly repayments	Owner gives up ownership, control and a share of profit
Share capital	Company sells shares	No repayment; no interest	Ownership shared; dividends paid; companies only
Loans	Fixed sum repaid with interest	Certain amount; ownership kept	Repayments must be met in poor months; security may be asked for
Retained profit	Profit kept in the business	No interest; no outsiders	Only exists if profitable; less for owners
Crowd funding	Many small contributions, usually online	Tests demand; no bank needed	Needs enough backers; terms vary

Loan interest formula

Interest (on loans) in % = (total repayment - borrowed amount) / borrowed amount × 100.

Worked reminder: borrow £7,500, repay £9,000 in total. Interest = 1,500. Percentage = 1,500 / 7,500 × 100 = 20%.

Start-up versus established

• A start-up has no trading history and no retained profit. It leans on savings, loans, share capital, venture capital or crowd funding. Trade credit may be hard to get.
• An established small business can add retained profit, and its record helps with lenders and suppliers.

4. Matching finance to need

Need	Better fit	Why
Short gap in cash	Overdraft, trade credit	Flexible, short term
Equipment lasting years	Loan, retained profit	Repaid over its useful life
Large growth, owner willing to share control	Venture capital, share capital	Big sums, no repayment
Small project with a ready audience	Crowd funding	Tests demand

For “justify” or “evaluate”, always weigh cost, certainty, control, speed and the firm’s ability to repay, then reach a reasoned conclusion that uses the data given.

Must-know distinctions

• Cash is not profit. Cash is money moved. Profit is revenue minus costs.
• Inflow is not revenue. A loan is an inflow but not revenue.
• Overdraft is not a loan. An overdraft is flexible and short term. A loan is a set amount repaid on agreed dates.
• Share capital is not venture capital. Share capital is raised by a company selling shares. Venture capital is an investor funding a business for a stake.
• Retained profit is not cash in the bank. It is profit kept in the business, which may already have been spent on stock or equipment.

Quick self-test

1. Name two things a business needs cash to pay.
2. Define insolvency.
3. A month has inflows of £8,200 and outflows of £9,050. Calculate net cash flow.
4. The opening balance was £1,000 in question 3. State the closing balance.
5. A month closes at £600 and the next has net cash flow of +£350. What is its closing balance?
6. A business borrows £6,000 and repays £6,900. Calculate the interest as a percentage.
7. A job brings sales revenue of £7,500 and costs £4,800. How much profit does it make, and why might cash still be short?
8. Give two short-term sources of finance.
9. Name two long-term sources a start-up could use but an established business could also use, and one only an established business has.
10. State one disadvantage of venture capital for the owner.

Answers

1. Any two of suppliers, overheads (such as rent) and employees.
2. A business cannot pay its debts when they are due.
3. 8,200 - 9,050 = -£850.
4. 1,000 + (-850) = £150.
5. 600 + 350 = £950 (the opening balance is the previous closing balance).
6. (6,900 - 6,000) / 6,000 × 100 = 15%.
7. Profit = 7,500 - 4,800 = £2,700. Cash can be short if the customer has not yet paid or if the costs were paid up front.
8. Overdraft and trade credit.
9. Any two of personal savings, loans, share capital, venture capital, crowd funding; retained profit is the one only an established business has.
10. The owner gives up part of the ownership and some control, and shares future profit.

Where marks are usually lost

• Writing “profit” when the question asks about cash, or the reverse.
• Misreading a negative net cash flow as a loss.
• Forgetting to carry the closing balance forward as the next opening balance.
• Subtracting inflows from outflows in the wrong order.
• Using a long-term source for a short gap, or the reverse, without justification.
• Listing advantages of a source without linking them to the business in the case.
• Giving a recommendation with no counter-argument on “justify” or “evaluate” questions.
• Giving an interest percentage without dividing by the amount borrowed.

Frequently asked questions

What is insolvency in GCSE Business? Insolvency means a business cannot pay its debts when they fall due. Many profitable small businesses still fail because cash runs out before the money from customers arrives.

What is the difference between short-term and long-term sources of finance? Short-term sources, such as an overdraft and trade credit, cover temporary cash gaps and day-to-day running costs. Long-term sources, such as personal savings, venture capital, share capital, loans, retained profit and crowd funding, fund start-up costs, equipment, premises and growth.

Which sources of finance can a start-up use? A start-up has no trading history and no retained profit, so it usually relies on personal savings, a loan, share capital, venture capital or crowd funding. It may find trade credit harder to obtain than an established business does.

Is a loan counted as profit on a cash-flow forecast? No. A loan received is a cash inflow, but it is not sales revenue and it is not profit. Counting a loan as revenue is a common error in Edexcel GCSE Business (1BS0) answers.

Official syllabus

Pearson Edexcel Level 1/Level 2 GCSE (9-1) in Business (1BS0), Specification, Issue 2, July 2022, published by Pearson Education Limited. Theme 1: Investigating small business, Topic 1.3 Putting a business idea into practice, items 1.3.3 and 1.3.4.