Edexcel International A Level Business: Planning a business and raising finance (YBS11) – Revision Notes

Quick recall notes for section 2.3.1, Planning a business and raising finance, in Unit 2 of the Pearson Edexcel International Advanced Subsidiary/Advanced Level in Business (YBS11) specification, Issue 1, September 2017. The study guide holds the full explanations and worked examples; check your recall with the practice questions. Earlier unit-level pages: unit revision notes and unit study guide. Course hub: Edexcel A Level Business. Printable list: checklist. Unsure where you stand? Take the free diagnostics. Amounts are in dollars.

1 Planning

Point	Recall
Content (1a)	Idea and aims; market research; marketing plan; operations; owners and managers; financial information (start-up costs, forecasts, finance needed)
Uses (1b)	Inside: test the idea, set targets, compare actual with plan. Outside: persuade banks and investors to provide finance
Limits	Forecasts are estimates; poor research gives false comfort; markets change

Method for a “use of a business plan” answer:

1. Name the user (owner, lender or investor).
2. State what that user does with the plan.
3. Link to the business in the case: a plan that shows how a loan will be repaid persuades a bank.

2 Internal finance

Source (2)	Plus	Minus
Owner’s capital: personal savings	No interest, full control	Limited amount; personal risk
Retained profit	No interest, no outside control	None in a new or loss-making business; slow
Sale of assets	Cash without borrowing	Asset lost; may sell for less than its book value

Small reminder: Northgate Loom sells a machine with a book value of 8,000 for 6,500. It raises 6,500 of cash but receives 1,500 less than the book value.

3 External finance

Sources (3a)

Source	Key feature	Typical fit
Family and friends	Informal, flexible, cheap	Start-ups with little track record; risk to relationships
Banks	Loans and overdrafts; interest and security	Businesses with a sound plan
Peer-to-peer funding	Individuals lend via an online platform	Borrowers wanting an alternative to a bank
Business angels	Wealthy individuals invest for a share, may advise	Early-stage, high-growth ideas
Crowd funding	Many small contributions online	Consumer products that can attract public interest
Other businesses	Supplier, customer or partner lends or invests	Ventures that help the other business too

Methods (3b)

Method	Key feature	Best for
Loan	Fixed sum, interest, set repayment	Long-term purchases
Share capital	Sell shares; no repayment or interest; shares control	Companies seeking permanent funds
Venture capital	Specialist firm buys shares in a risky growth business	High growth, high risk
Overdraft	Borrow up to a limit; flexible; costly	Short-term cash gaps
Leasing	Use, not own; regular payments	Equipment, avoiding a big outlay
Trade credit	Pay supplier later	Everyday inventory purchases
Grants	Often non-repayable; conditions apply	Projects that meet a funder’s purpose

Small reminders:

• Loan interest: Sunbeam Sprouts borrows 12,000 at 10% a year on the outstanding balance and repays 6,000 of capital at the end of each of two years. Interest is 12,000 × 0.10 = 1,200, then 6,000 × 0.10 = 600, so 1,800 in total.
• Trade credit: if goods are bought on 45 days’ credit and sold within 20 days, the supplier is paid 25 days after the cash arrives, so the credit is financing inventory.
• Share capital: an owner holding 80 of 100 shares who sells 25 new shares owns 80 ÷ 125 = 64%. Ownership is diluted but the company has gained funds.

Method for “suitability” answers:

1. Identify the circumstance: amount, length of time, risk, control wanted.
2. Choose the finance that fits it.
3. Give one reason it fits and one drawback.
4. Say why it is better than the nearest alternative.

4 Forms of business

Form (4)	Owners and liability	Finance	One advantage	One disadvantage
Sole trader	One; unlimited	Savings, retained profit, loans	Full control and all profit	Personal risk; limited funds
Partnership	Two or more; generally unlimited	Partners’ capital, loans	Shared skills and capital	Disputes; shared profit
Private limited company (Ltd)	Shareholders; limited	Shares to chosen investors, loans	Limited liability	More administration; shares kept off the open market
Public limited company (plc)	Shareholders; limited	Shares to the public	Large capital	Cost, disclosure, takeover risk

Other forms (4b):

• Franchising: pay a fee and often a share of revenue to use a brand and system. Reminder: a franchise charging 4% of revenue takes 6,000 from revenue of 150,000.
• Social enterprise: trades to meet social or environmental aims and reinvests most profit.
• Lifestyle business: run for a chosen way of life, with little wish to grow.
• Online business: sells through a website or app; low entry cost, high competition.

Stock market flotation (4c): selling shares to the public for the first time and getting them listed. For: large capital, profile, easier later issues. Against: cost, disclosure, shareholder pressure for profit, loss of control.

5 Liability

	Unlimited	Limited
Meaning	Owner personally responsible for all business debts	Shareholder’s loss limited to the amount invested
Who	Sole traders; partners generally	Shareholders in Ltd and plc
Advantage	Simple, few formalities	Protects personal assets; attracts investors
Disadvantage	Personal assets at risk	More paperwork and published information
Finance (5b)	Savings, retained profit, loans, family and friends	Also shares, angels, venture capital; plc can float

Describe the legal position in general terms only.

Small reminder: Two partners share profit of 50,000 in the ratio 3:2. Shares are 30,000 and 20,000.

Matching finance to circumstances

Circumstance	Likely fit	Reason to give
Short gap between paying costs and receiving cash	Overdraft, trade credit	Flexible, repaid quickly, interest only on use
Buying machinery that lasts years	Loan, leasing, share capital	Repayment can be spread across the asset’s life
New idea with high risk but strong growth potential	Business angel, venture capital, crowd funding	Investors accept risk for a share of the upside
Owner wants to keep full control	Savings, retained profit, loan	No new owners are created
Cannot borrow and has no savings	Family and friends, grants, crowd funding	Less reliance on credit history
Large expansion of an established company	Share issue, flotation as a plc	Raises large sums with no repayment date

Always finish with a reason and a drawback. A judgement question needs both sides and a decision.

Words to define precisely

• Business plan: a written document setting out the aims, market, operations and finances of a business and the finance it needs.
• Retained profit: the part of profit that stays in the business instead of going to owners.
• Share capital: money raised by selling shares in a company.
• Limited liability: a shareholder’s loss is limited to the amount invested in shares.
• Unlimited liability: the owner is personally responsible for all the business’s debts.
• Flotation: first sale of a company’s shares to the public on a stock market.

Must-know distinctions

• Internal against external finance: internal comes from the business or its owner; external from outside.
• Source against method: a bank (source) can provide a loan or an overdraft (methods).
• Share capital against loan: shares give ownership and need no repayment; a loan gives no ownership and must be repaid.
• Ltd against plc: a Ltd may not sell its shares to the public, whereas a plc may.
• Venture capital against business angel: a specialist firm against a wealthy individual.
• Leasing against buying: leasing avoids the outlay but the asset is not owned.

Quick self-test

1. Name two items found in a business plan.
2. State one way a business plan helps a bank.
3. Give two internal sources of finance.
4. Why might a new business have no retained profit?
5. Calculate the interest in year 1 on a 20,000 loan at 8% on the outstanding balance.
6. Which method suits a short-term cash gap, an overdraft or a loan?
7. An owner holds 70 of 100 shares and 30 new shares are sold to an investor. What percentage does the owner now hold?
8. State one disadvantage of unlimited liability.
9. Name the process of selling shares to the public for the first time.
10. State one way a social enterprise differs from a conventional business.

Answers

1. Any two from: aims, market research, marketing plan, operations, management, financial forecasts.
2. It shows the bank how much is needed, what it is for and how it will be repaid.
3. Any two of owner’s capital, retained profit, sale of assets.
4. Because a new business may not yet have made a profit to keep.
5. 20,000 × 0.08 = 1,600.
6. An overdraft.
7. 70 ÷ 130 = 53.8%.
8. Business debts can be recovered from what the owner personally holds.
9. Stock market flotation.
10. It trades mainly to meet social or environmental aims and reinvests most profit, rather than maximising returns to owners.

Where marks are usually lost

• Describing a source of finance without saying why it suits the case.
• Using the same word for source and method.
• Calling retained profit a bank-style loan.
• Saying shares are repaid like a loan.
• Confusing Ltd and plc.
• Stating liability rules in legal detail instead of general terms.
• Ignoring the control the owner wants to keep.
• Giving only advantages in a judgement question.

Frequently asked questions

What is the difference between a source and a method of finance? A source is who provides the money, such as a bank or a business angel. A method is the form the money takes, such as a loan or an overdraft, and one source can supply several methods.

What are the internal sources of finance in Edexcel IAL Business? The YBS11 specification lists owner’s capital (personal savings), retained profit and the sale of assets. Internal finance suits small, low-risk needs but is rarely enough for rapid expansion.

What is a business angel? A business angel is a wealthy individual who invests their own money in a business, often taking a share of ownership and offering advice. Business angels suit early-stage businesses with growth potential.

Does a grant have to be repaid? No. A grant is money from a government or other body, often for a stated purpose, that need not be repaid, although conditions apply and competition for it can be strong.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Business specification, Issue 1, September 2017, Pearson Education Limited: Unit 2, section 2.3.1.