OCR GCSE Business: Finance (J204)

This guide covers section 5, Finance, of the OCR GCSE (9-1) Business (J204) specification, Version 2.0 (January 2026): topics 5.1 to 5.5. Finance sits in Business 2: operations, finance and influences on business (J204/02). The specification says at least 10% of the total marks for the qualification reward quantitative skills, so the calculations below matter. Work through each example with a calculator and cover the answer before you read it.

Related pages: the revision notes and practice questions for this topic, the wider Business 2 study guide, the Business 2 revision notes and the Business 2 practice set. Course hub: OCR GCSE Business. Tick things off on the checklist. To find weak spots first, try the free diagnostics.

What the topic covers

Ref	Content
5.1	The role of the finance function: its purpose and its influence on business activity
5.2	Sources of finance: why businesses need it, ways of raising it, and which suits new or established businesses
5.3	Revenue, costs, profit and loss; fixed, variable and total costs; gross and net profit; gross and net profit margin; average rate of return
5.4	Break-even: the concept, simple calculation of break-even quantity, usefulness
5.5	Cash and cash flow: importance of cash, cash versus profit, cash flow forecasts and completing them

5.1 The role of the finance function

The finance function is the part of a business that handles its money. Its purpose is to provide financial information and to support business planning and decision making. Managers cannot decide sensibly about hiring, buying equipment or launching a product without knowing what the business earns, spends and owes.

Its influence on business activity shows in the decisions it shapes. If finance reports that cash is tight, marketing may have to shrink a campaign and operations may delay new equipment. If it reports healthy profit, the business may recruit or expand. Finance does not work alone: its figures affect every other function, and their needs shape what finance has to report.

5.2 Sources of finance

Why businesses need finance

The specification lists these reasons: establishing a new business, funding expansion, to run the business, recruitment and marketing. Each is a different kind of need. Start-up money buys premises and stock before any sales arrive. Expansion money pays for a bigger workshop or a second shop. Running money covers wages and bills while customers have not yet paid. Recruitment costs cover advertising, training and wages for new staff. Marketing needs money before it brings in sales.

Ways of raising finance

Source	What it is	Points to weigh
Loan	A sum borrowed and repaid, with interest, over an agreed period	Large sums for long-term needs; repayments and interest must be met
Overdraft	Spending more than is in the bank account, up to an agreed limit	Flexible and quick for short-term gaps; usually costly if used for long
Trade credit	Receiving goods or services now and paying the supplier later	No borrowing as such; delays cash leaving, but depends on supplier agreement
Retained profit	Profit kept in the business rather than paid out	No interest and no outsiders; only possible once the business has made profit
Sale of assets	Selling items the business owns, such as a van or machine	Raises cash without borrowing; the asset is lost
Owners’ capital	Money the owner puts in from personal savings	Quick, no interest; limited by what the owner has and puts personal money at risk
New partner	A new part-owner joins and brings money	Extra funds and skills; ownership and decisions are shared
Share issue	A company sells shares to investors	Can raise large sums; ownership is spread (in general, a route for companies)
Crowdfunding	Many people each put in a small amount, often online	Suits ideas that appeal to the public; needs a convincing pitch and may not reach its target

Suitability: new and established businesses

A new business has no profit history, so retained profit is not available and lenders may hesitate. It tends to rely on owners’ capital, family and friends, crowdfunding or a small loan. An established business has trading records, assets and retained profit, so it can borrow more easily, use retained profit, sell spare assets or, if a company, issue shares.

Match the source to the need and the time span. Short gaps in cash suit an overdraft or trade credit. Long-term purchases suit a loan, retained profit or capital.

Example. Halbeck Kayak Hire has traded for six years. It wants a new storage shed costing £18,000 and has £7,500 of retained profit. Retained profit covers part of the cost without interest. A loan could cover the remaining £10,500. An overdraft would be a poor fit because the need is long-term, not a short gap.

5.3 Revenue, costs, profit and loss

Revenue and costs

Revenue is the money a business receives from sales: revenue = selling price × quantity sold. Costs are what it pays out.

• Fixed costs do not change as output changes in the short term, such as rent.
• Variable costs rise and fall with output, such as ingredients.
• Total costs = fixed costs + variable costs.

Worked example. Stonewick Bakery sells 3,500 cakes in a month at £4.20 each. Fixed costs are £6,300. Variable cost is £1.40 per cake.

• Revenue = 3,500 × £4.20 = £14,700
• Variable costs = 3,500 × £1.40 = £4,900
• Total costs = £6,300 + £4,900 = £11,200
• Profit = revenue − total costs = £14,700 − £11,200 = £3,500

If total costs are higher than revenue, the result is a loss. These figures matter in decisions because they show whether a plan, price or product can pay its way.

Gross profit and net profit

• Gross profit = revenue − cost of sales (what it cost to buy or make the goods sold). The specification names gross profit but does not define cost of sales; this is the standard form.
• Net profit = gross profit − other business expenses (rent, wages, utilities and so on)

Profitability ratios

The specification names the gross profit margin and net profit margin. The standard forms are:

• Gross profit margin (%) = (gross profit ÷ revenue) × 100
• Net profit margin (%) = (net profit ÷ revenue) × 100

Worked example. Fenlow Candle Works sold 4,000 candles at £24 in its first year.

	Year 1	Year 2
Revenue	£96,000	£110,400
Cost of sales	£57,600	£68,448
Gross profit	£38,400	£41,952
Other expenses	£24,960	£27,600
Net profit	£13,440	£14,352
Gross profit margin	40%	38%
Net profit margin	14%	13%

Revenue rose by about 14.4% (£13,800 ÷ £96,000 × 100). Net profit rose in pounds, by about 6.8%, but both margins fell. That means the business kept fewer pence of profit from each pound of sales. Possible causes are dearer materials (cost of sales rose faster than revenue) and higher running costs. Interpretation matters as much as the calculation: a rising profit figure can hide a weakening margin.

Average rate of return

Average rate of return (ARR) compares the profit an investment earns with what it cost. The specification does not print a formula, so this is the standard form:

ARR (%) = (average annual profit ÷ cost of the investment) × 100

Where you are given yearly profits, average annual profit = total profit ÷ number of years. Where you are given total returns instead, subtract the cost first to find the total profit.

Worked example. Pickthorn Garden Centre is choosing between two projects.

• Project A, a greenhouse costing £50,000, is forecast to add profit of £5,200, £7,400, £9,000 and £8,400 over four years. Total = £30,000. Average = £7,500. ARR = 7,500 ÷ 50,000 × 100 = 15%.
• Project B, a café extension costing £32,000, is forecast to add £20,800 in total over four years. Average = £5,200. ARR = 5,200 ÷ 32,000 × 100 = 16.25%.

Project A earns more pounds, but Project B earns more for each pound spent. A good answer says so, then adds what ARR leaves out: it ignores risk, and the forecasts may be wrong.

5.4 Break-even

Break-even is the level of sales at which total costs equal total revenue, so the business makes neither profit nor loss. Below it there is a loss; above it, a profit.

Standard form for the simple calculation:

• Contribution per unit = selling price − variable cost per unit
• Break-even quantity = fixed costs ÷ contribution per unit

Worked example. Halbeck Kayak Hire charges £28 per session. Variable cost is £11 per session and fixed costs are £5,100 per month.

• Contribution = £28 − £11 = £17
• Break-even quantity = 5,100 ÷ 17 = 300 sessions
• Check: revenue = 300 × £28 = £8,400; total costs = £5,100 + (300 × £11) = £8,400

If Halbeck sells 380 sessions, profit = (380 − 300) × £17 = £1,360. At 250 sessions the loss is 50 × £17 = £850.

If a result is not a whole number, round up, because part of a session cannot be sold. Raising the price to £30 gives contribution £19 and 5,100 ÷ 19 = 268.4, so 269 sessions.

Usefulness. Break-even informs marketing and planning decisions. It shows whether a price is realistic, whether expected sales are enough, and how a price change shifts the sales needed. General limits (not listed in the specification): it assumes all output is sold, and costs and prices stay constant, which real businesses rarely manage.

5.5 Cash and cash flow

Cash is the money a business has available to spend. It provides liquidity: the ability to meet short-term debts and expenses such as wages, suppliers and bills. A business with profit on paper but no cash cannot pay these.

Cash versus profit

Profit is revenue minus costs over a period. Cash is the actual money moving in and out. They differ because of timing. A sale on credit counts as revenue when made, but the cash arrives later. Buying stock or equipment takes cash out at once, though its effect on profit is spread out.

Cash flow forecasts

A cash flow forecast predicts money coming in and going out, usually month by month. Its usefulness: it is a planning tool, it anticipates periods of cash shortage, it enables remedies to be put in place for shortages, and it provides targets.

Layout, month by month:

• Total cash in (receipts) and total cash out (payments)
• Net cash flow = cash in − cash out
• Closing balance = opening balance + net cash flow
• This month’s closing balance becomes next month’s opening balance

Worked example. Drovers Cycle Repairs starts January with £2,400.

	Jan	Feb	Mar
Opening balance	£2,400	£1,600	−£200
Cash in	£7,800	£6,900	£9,500
Parts and stock	£3,200	£3,100	£3,300
Wages	£3,400	£3,600	£3,000
Rent and bills	£2,000	£2,000	£2,000
Total cash out	£8,600	£8,700	£8,300
Net cash flow	−£800	−£1,800	£1,200
Closing balance	£1,600	−£200	£1,000

February ends £200 overdrawn. Remedies include arranging an overdraft, asking suppliers for longer trade credit, chasing customers who owe money, or delaying a purchase. Because the forecast showed the problem in advance, the owner can act in time.

Common errors

• Writing “profit” when the question asks about “cash” (or the other way round).
• Using revenue instead of gross profit in the numerator of a margin.
• Forgetting to carry the closing balance forward as next month’s opening balance.
• Giving a break-even figure with no units, or dividing by selling price instead of contribution.
• Listing sources of finance without matching them to the business and need.
• Quoting ARR as a bare percentage, with no comment on what it means.

Frequently asked questions

What is the difference between fixed and variable costs? Fixed costs, such as rent, do not change as output changes in the short term. Variable costs, such as materials, rise and fall with output.

What does break-even tell a business? Break-even is the level of sales at which total costs equal total revenue, so the business makes neither a profit nor a loss. It informs marketing and planning decisions, such as whether a price or sales target is realistic.

What is liquidity? Liquidity is the ability of a business to meet its short-term debts and expenses. Cash provides liquidity, which is why a business can fail through running out of cash even when it is profitable.

Official syllabus

OCR, GCSE (9-1) in Business (J204) Specification, Version 2.0 (January 2026), section 2c, content of Business 2: operations, finance and influences on business, topic 5 Finance, and Appendix 5c, quantitative skills requirement.