OxfordAQA A-Level Business: Finance (9725) – Revision Notes

Condensed recall for the final weeks. For full explanations and worked examples, use the Finance study guide.

These notes follow section 3.2.3 Finance of the OxfordAQA International AS and A-level Business (9725) specification, Version 1.1: 3.2.3.1 Sources of finance, 3.2.3.2 Break-even analysis and 3.2.3.3 Profit and cash. All of it is International AS content (Unit 2), examined from May/June 2027; none is International A-level only. If you are finishing the older 9625 specification, use your own specification.

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3.2.3.1 Sources of finance

Internal: retained profits, sale of assets, sale and leaseback, working capital. External: trade credit, share capital, overdraft, loans, business angels, private equity, crowd funding.

Source	One key plus	One key minus
Retained profits	No interest or dilution	Needs past profit; less for dividends
Sale of assets	Cash from idle assets	Asset lost; may sell cheaply
Sale and leaseback	Large sum, keep using asset	Ongoing lease payments
Working capital	Frees cash tied up in inventory or receivables	Small sums; risk of stock-outs
Trade credit	Free short-term finance	Supplier relations; lost discounts
Share capital	Permanent, no interest	Dilutes ownership and control
Overdraft	Flexible, short-term	Expensive; repayable on demand
Loans	Planned repayments	Interest and security
Business angels	Money plus expertise	Give up equity
Private equity	Large sums	Loss of control; pressure for returns
Crowd funding	Many backers; tests demand	May fail to reach target; idea exposed

Method: choosing a source.

1. How much? Small sums rule out share issues and private equity.
2. How long? Short-term need → short-term source (overdraft, trade credit). Long-life asset → loan or equity.
3. Can it be repaid? Uncertain cash flow favours equity over debt.
4. Control? Owners who want control avoid share capital, angels and private equity.
5. What is available? A start-up has no retained profit and no trading record.

3.2.3.2 Break-even analysis

Measure	Formula
Variable costs	Variable cost per unit × number of units
Total costs	Fixed costs + variable costs
Revenue	Price per unit × quantity sold
Profit	Total revenue − total costs
Contribution per unit	Price − variable cost per unit
Total contribution	Contribution per unit × units sold
Break-even output	Fixed costs ÷ contribution per unit
Margin of safety	Actual output − break-even output

Shortcut: above break-even, profit = margin of safety × contribution per unit. Below it, loss = fixed costs − total contribution.

Chart reading.

• Fixed costs: horizontal line.
• Total costs: starts at fixed costs, slope = variable cost per unit.
• Revenue: starts at zero, slope = price.
• Break-even: where revenue meets total costs.
• Profit or loss: vertical gap between revenue and total costs.

Chart changes.

Change	Line that moves	Break-even
Price up	Revenue line steeper	Falls
Fixed costs up	Fixed and total cost lines shift up	Rises
Variable cost per unit up	Total cost line steeper	Rises
Variable cost per unit down	Total cost line flatter	Falls

Limits: assumes all output sold at one price and straight-line costs; only as good as the cost estimates.

Worked reminder. A tutoring firm charges £30 per session, pays the tutor £12 per session and has fixed costs of £2,700 a month. Contribution = 30 − 12 = £18; break-even = 2,700 ÷ 18 = 150 sessions. At 190 sessions the margin of safety is 40 sessions and profit is 40 × 18 = £720. Check the long way: revenue 190 × 30 = £5,700; total costs 2,700 + (190 × 12) = £4,980; profit £720.

3.2.3.3 Profit and cash

Profit

Measure	Formula
Gross profit	Revenue − cost of sales
Operating profit	Gross profit − operating expenses
Net profit	Operating profit − interest − taxes
Gross profit margin (%)	Gross profit ÷ revenue × 100
Operating profit margin (%)	Operating profit ÷ revenue × 100
Net profit margin (%)	Net profit ÷ revenue × 100

Reading margins together. A high gross margin with a low operating margin points to heavy overheads. A fall in net margin while operating margin holds points to higher interest or taxes. Compare margins over time or with rivals, not in isolation.

Ways to improve profit/profitability: raise price (watch elasticity), cut variable costs (watch quality), cut fixed costs (watch capacity and morale), raise volume (watch promotion cost and capacity).

Budgeting

Variance = actual − budget. Then decide F or A by its effect on profit:

	Actual above budget	Actual below budget
Revenue	Favourable	Adverse
Cost	Adverse	Favourable

Method: amending a budget statement.

1. Calculate each line’s variance.
2. Label each F or A by its effect on profit.
3. Recalculate profit for budget and actual.
4. Check: profit variance = favourable total − adverse total.

Cash flow

Measure	Formula
Net cash flow	Inflows − outflows
Closing balance	Opening balance + net cash flow
Opening balance	Previous closing balance
Receivables days	Trade receivables ÷ revenue × 365
Payables days	Trade payables ÷ cost of sales × 365

Method: completing a forecast.

1. Total inflows and outflows for the month.
2. Net cash flow = inflows − outflows (bracket negatives).
3. Closing = opening + net.
4. Carry the closing balance across as next month’s opening.

Why cash matters and why forecasts help: cash pays wages, suppliers and lenders on time; a forecast shows when a shortfall is coming, supports a bank application and lets managers plan payments. It is only as reliable as its sales estimates.

Reading the days figures: if receivables days are longer than payables days, the business pays out before it is paid and must finance the gap.

Improving cash flow: debt factoring, shortening payment time from customers, early payment incentives, credit checks, increasing payment time to suppliers, reducing outgoings, better invoice management. Each one either speeds up inflows or delays or cuts outflows – say which, then give its cost.

Must-know distinctions

• Profit vs cash: profit is earned when a sale is made; cash arrives when the customer pays. Credit sales, buying inventory and paying for assets all make the two differ.
• Profit vs profitability: profit is a sum of money; profitability is profit relative to revenue (a margin).
• Contribution vs profit: contribution is before fixed costs; profit is after.
• Overdraft vs loan: overdraft for short-term, flexible needs; loan for a known sum over years.
• Business angel vs private equity: an angel is an individual backing small or new firms; private equity firms invest larger sums, often taking control.
• Receivables vs payables: money owed to the business vs money owed by it.

Quick self-test

1. A product sells for £45, variable cost per unit is £27 and fixed costs are £54,000. Calculate break-even output.
2. Actual sales are 3,800 units. Calculate the margin of safety.
3. Calculate profit at 3,800 units.
4. Calculate total contribution at 3,800 units.
5. Revenue is £250,000 and gross profit is £95,000. Calculate the gross profit margin.
6. Operating profit is £30,000 on the same revenue. Calculate the operating profit margin.
7. Budgeted material costs were £20,000; actual were £22,500. State the variance.
8. Opening balance £1,800, inflows £6,400, outflows £7,900. Calculate the closing balance.
9. Trade receivables are £18,000 and revenue is £219,000. Calculate receivables days.
10. State what happens to break-even output if variable cost per unit falls.
11. Explain why an overdraft is unsuitable for buying a delivery van.
12. Define sale and leaseback.

Answers

1. Contribution = 45 − 27 = £18; break-even = 54,000 ÷ 18 = 3,000 units.
2. 3,800 − 3,000 = 800 units.
3. 800 × 18 = £14,400 profit.
4. 3,800 × 18 = £68,400 (and 68,400 − 54,000 = £14,400, matching answer 3).
5. 95,000 ÷ 250,000 × 100 = 38%.
6. 30,000 ÷ 250,000 × 100 = 12%.
7. 22,500 − 20,000 = £2,500 adverse (a cost above budget).
8. 1,800 + 6,400 − 7,900 = £300.
9. 18,000 ÷ 219,000 × 365 = 30 days.
10. Contribution per unit rises, so break-even output falls.
11. The van is a long-term asset but an overdraft is short-term, costly and can be withdrawn; a loan matches repayments to the van’s life.
12. Selling an asset, usually property, to raise cash and then leasing it back so the business keeps using it.

Where marks are usually lost

• Writing “break-even = fixed costs ÷ price” – the divisor is contribution per unit.
• Leaving break-even as a decimal or rounding it down; you cannot sell part of a unit, so round up.
• Giving margin of safety in £ when the question asks for units, or the reverse.
• Labelling a variance F or A by its sign alone rather than by its effect on profit.
• Subtracting only interest, or only taxes, when calculating net profit.
• Using cost of sales as the denominator in a profit margin; margins are always over revenue.
• Starting a month’s cash flow with the wrong opening balance.
• Listing ways to improve cash flow without the drawback for this business.
• Recommending a source of finance without linking it to the amount, time period and control.

Official syllabus

OxfordAQA International AS and A-level Business (9725) specification, Version 1.1, for International AS exams May/June 2027 onwards and International A-level exams May/June 2028 onwards, published by OxfordAQA. Section 3.2.3 Finance.