Edexcel IGCSE Business: Sources of business finance and cash flow forecasting (4BS1) – Revision Notes

Quick recall for the Pearson Edexcel International GCSE in Business (4BS1) specification, Issue 2, February 2026, Topic 3, sections 3.1 and 3.2. Full explanations and worked examples are in the study guide. Then try the practice questions. Course links: the 4BS1 Business hub, the printable checklist and the free diagnostics. The specification says both papers draw on the whole of the subject content.

3.1.1 The need for finance

Need	Meaning	Example
Short-term	Covers day-to-day costs, repaid or recovered quickly	Buying inventory, paying wages before customers pay
Long-term	Spending on assets that last years	A new factory, vehicles
To start up	Costs before first sales	Premises, equipment, first inventory
To expand	Growth of an existing business	A second shop, a new product line

Pick finance that lasts as long as the need.

3.1.2 Internal sources

Source	Plus	Minus
Personal savings	No interest, no outsider control	Limited amount, owner’s own money at risk
Retained profit	No interest, no repayment	Needs past profit; less paid out to owners
Selling assets	Quick cash, no interest	Lose the asset; price may be low

3.1.3 External sources

The specification names these sources only. The descriptions, pluses and minuses are standard business knowledge, not specification text.

Source	Short or long term	Plus	Minus
Overdraft	Short	Flexible, interest only on amount used	High interest, can be recalled by the bank
Trade payables	Short	Free credit from suppliers	May lose discount or future credit
Loan capital	Long	No loss of ownership	Repayments and interest must be paid; security may be asked for
Share capital	Long	No repayment or interest	Ownership and control shared; dividends paid
Stock market flotation (plc)	Long	Can raise very large sums	Costly, more reporting, takeover possible
Venture capital	Long	Funds risky ventures, advice from investors	Give up part of ownership and control
Crowdfunding	Either	Tests demand, no bank needed	Target may be missed, effort to run

Method: recommend a source

1. Identify the need: short-term or long-term; start-up or expansion.
2. Check the business type: only companies issue shares, and only a plc can float on the stock market.
3. Match the length of the finance to the need.
4. Name one benefit and one drawback of your choice.
5. Say why one rejected source is weaker, then give a judgement.

3.2.1 Why cash matters

• Cash pays suppliers, overheads (rent, electricity, insurance) and employees.
• A business unable to pay its debts on time is insolvent. Running out of cash can force failure even when sales are good.
• Profit = revenue minus costs over a period. Cash = money actually received and paid. Timing makes them differ.

Event	Effect on profit	Effect on cash
Sale made on credit	Rises when the sale is made	No change until the customer pays
Machine bought for cash	Cost spread over its life	Falls by the full price at once
Loan received	None	Rises
Bulk inventory bought, unsold	None yet	Falls

3.2.2 Cash-flow forecasts

Term	Definition
Cash inflows	Money received in the month
Cash outflows	Money paid out in the month
Net cash flow	Total inflows - total outflows
Opening balance	Previous month’s closing balance
Closing balance	Opening balance + net cash flow

Method: complete a forecast

1. Total the inflows for each month.
2. Total the outflows for each month.
3. Net cash flow = inflows - outflows (negative if outflows are bigger).
4. Add net cash flow to the opening balance to get the closing balance.
5. Make each closing balance the following month’s opening balance.
6. Check the last closing balance by adding all net cash flows to the first opening balance.

Worked reminder: Tanvir’s Juice Bar

Opening balance in month 1 is 1,500.

	Month 1	Month 2	Month 3
Cash sales (inflow)	6,000	5,200	7,400
Inventory	3,100	2,700	3,600
Wages	2,400	2,400	2,000
Other costs	800	500	500
Total outflows	6,300	5,600	6,100
Net cash flow	-300	-400	1,300
Closing balance	1,200	800	2,100

Check: 1,500 - 300 - 400 + 1,300 = 2,100. The balance never goes negative, but it falls for two months. Reading: cash is tight in months 1 and 2, so the owner should not commit to a large purchase, and a recovery in month 3 depends on sales reaching 7,400.

Interpreting: what to say

• Negative closing balance: the business is forecast to run out of cash; suggest an overdraft, longer supplier terms, faster customer payment, delaying purchases or selling an asset.
• Large positive balance: spare cash that could repay a loan or fund expansion.
• Falling trend: ask whether the cause is a one-off (equipment) or a lasting problem (costs above sales).
• A forecast is a prediction, so it can be wrong.

Building answers

For a question that asks you to explain or analyse a source of finance, build a chain: say what the source is, give one point about how it works for this business, then add a consequence.

• Point: an overdraft lets the business spend more than its balance.
• Development: so it can pay suppliers during a quiet month without selling anything.
• Consequence: but interest is charged and the bank can call it back, so it is unsafe for a long-term purchase.

For a question that asks you to evaluate or justify, weigh the source against at least one alternative, use the facts in the case (size, type of business, urgency, amount needed) and end with a judgement you have reasoned, not a list.

For a cash-flow question, show each line of working: totals first, then net cash flow, then the closing balance. State units and the sign of a negative figure.

Must-know distinctions

• Internal vs external: internal comes from the owner or the business itself; external from outsiders.
• Loan capital vs share capital: a loan is borrowed and repaid with interest, and the lender gets no ownership. Share capital is not repaid, and shareholders own part of the company.
• Overdraft vs loan: an overdraft is a flexible, short-term borrowing limit on the account; a loan is a fixed sum repaid over a set time.
• Venture capital vs crowdfunding: a few specialist investors take a share of the business; many small backers each give a little.
• Net cash flow vs closing balance: change in the month vs cash held at the end.
• Profit vs cash: a measure of earnings vs a measure of money held.

Quick self-test

1. Give one example of a short-term need for finance and one of a long-term need.
2. Name the three internal sources in the specification.
3. State two drawbacks of an overdraft as a source of finance.
4. Which type of business can use a stock market flotation?
5. Explain one way trade payables act as a source of finance.
6. Define insolvency.
7. A business sells goods for 8,000 on credit that cost it 5,000 in cash this month. State its profit on the sale and its cash movement this month.
8. Inflows are 12,400 and outflows are 14,100. Calculate the net cash flow.
9. The opening balance is 2,300 and net cash flow is -3,000. Calculate the closing balance and say what it shows.
10. Explain why a new business may find retained profit hard to use at start-up.

Answers

1. Short-term: buying inventory or paying wages before customers pay. Long-term: buying a new building or machinery (accept equivalents).
2. Personal savings, retained profit, selling assets.
3. Any two from: interest can be high; the bank can ask for repayment at short notice; unsuitable for long-term needs.
4. A public limited company (plc).
5. The business receives goods now and pays later, so it keeps its cash for longer.
6. Unable to pay debts when they fall due.
7. Profit 8,000 - 5,000 = 3,000; cash movement -5,000 (the customers have not paid yet).
8. 12,400 - 14,100 = -1,700.
9. 2,300 + (-3,000) = -700. The business is forecast to be overdrawn, so it needs finance or action to improve cash.
10. It has no past profit yet to retain, so there is nothing to reinvest.

Where marks are usually lost

• Using the word profit in answers about cash, or treating a loan or the owner’s capital as income from sales.
• Starting a month with a figure other than the previous closing balance.
• Subtracting the wrong way round and getting net cash flow with the wrong sign.
• Naming a source of finance with no link to the business’s need or size.
• Giving only advantages, or only drawbacks, when a question asks you to weigh a choice.
• Suggesting share capital or a stock market flotation for a sole trader or small partnership.
• Saying a cash shortage means the business is making a loss.
• Describing the numbers (“it falls”) without a cause or a consequence.

Frequently asked questions

What are the internal sources of finance in Edexcel IGCSE Business? The 4BS1 specification lists personal savings, retained profit and selling assets. They carry no interest, but the amounts available are limited.

What is the difference between net cash flow and closing balance? Net cash flow is total cash inflows minus total cash outflows for the month, the change in cash. The closing balance is the opening balance plus net cash flow, the total cash held at the end of the month.

What is trade payables as a source of finance? Suppliers deliver goods now and the business pays later, for example in 30 days. It is a free, short-term source of finance because the business holds on to its cash for longer.

How do you choose a suitable source of finance? Match the finance to how long the need lasts: short-term needs suit an overdraft or trade payables, while long-term needs such as machinery suit loan capital, share capital or retained profit.

Official syllabus

Pearson Edexcel International GCSE in Business (4BS1), Specification, Issue 2, February 2026, published by Pearson Education Limited. Topic 3: Business finance, sections 3.1 “Business finance - sources” (3.1.1 to 3.1.3) and 3.2 “Cash flow forecasting” (3.2.1 to 3.2.2).