OxfordAQA A-Level Business: Finance (9725)

This guide teaches section 3.2.3 Finance of the OxfordAQA International AS and A-level Business (9725) specification, Version 1.1: sources of finance (3.2.3.1), break-even analysis (3.2.3.2) and profit and cash (3.2.3.3). All of it is International AS content, examined in Unit 2: Managing operations, human resources and finance, from the May/June 2027 series; none of it is International A-level only. If you are finishing the older 9625 specification, use your own specification instead.

Course hub: OxfordAQA A-Level Business · printable checklist · Finance revision notes · Finance practice questions · free 10-minute diagnostics

What this topic covers

Section	What you must be able to do
3.2.3.1 Sources of finance	Weigh up internal sources (retained profits, sale of assets, sale and leaseback, working capital) and external sources (trade credit, share capital, overdraft, loans, business angels, private equity, crowd funding); judge which suits a situation, such as a start-up
3.2.3.2 Break-even analysis	Calculate fixed, variable and total costs, revenue, profit, contribution per unit, total contribution, break-even output and margin of safety; interpret and manipulate break-even charts
3.2.3.3 Profit and cash	Calculate gross, operating and net profit and margins; explain profit vs cash and profit vs profitability; amend budgets and calculate variances; complete cash flow forecasts; use payables and receivables days; evaluate ways to improve profit and cash flow

The Unit 2 paper includes a calculation section (Section B, 10 marks), so the methods below need to be quick and accurate. Topic 1, What is business?, explains the forms of ownership that decide which sources of finance a business can use.

3.2.3.1 Sources of finance

Internal finance comes from within the business; external finance comes from outside it.

Internal source	Advantage	Disadvantage
Retained profits	No interest, no loss of control	Only exists if the business has made profit; shareholders get smaller dividends
Sale of assets	Turns unused assets into cash	Asset is gone; a forced sale may get a low price
Sale and leaseback	Releases a large sum while keeping use of the asset	Lease payments continue; the business no longer owns the asset
Working capital	Cutting inventory or chasing customers frees cash already tied up	Limited amounts; too little inventory can lose sales

External source	Advantage	Disadvantage
Trade credit	Use supplies before paying for them	Late payment damages supplier relations; may lose discounts
Share capital	No repayment, no interest; large sums possible	Dilutes control; owners expect dividends
Overdraft	Flexible; interest only on what is used	High interest; the bank can withdraw it
Loans	Fixed repayments make planning easier	Interest; security often needed; repayment is due whatever happens to sales
Business angels	Money plus experience and contacts	Give up a share of ownership and some control
Private equity	Large sums for growth or restructuring	Investors may demand control and a fast return
Crowd funding	Reaches many small backers; tests demand	Campaign may miss its target; idea is public

Matching the source to the situation. Ask four questions: how much is needed, for how long, can the business repay it, and will the owners give up control? A start-up has no retained profits and no trading record, so banks may lend only with security; business angels, crowd funding and the owner’s own share capital are common answers. A short-term cash gap suits an overdraft or trade credit. A long-life asset such as machinery suits a loan, because repayments are spread over the asset’s working life.

Worked example. Quillcote Print Studio, a sole trader with three years of profits and a workshop it owns outright, needs £40,000 for a large-format printer that will last eight years. Judgement: a bank loan fits – the amount is fixed, the printer earns revenue for years, and the trading record and the workshop as security support borrowing; retained profit could cover part of it. Sale and leaseback of the workshop would raise more but adds rent for good, which is costly for a £40,000 need. An overdraft would be long-term debt repayable on demand.

3.2.3.2 Break-even analysis

Term	Calculation
Fixed costs	Do not change with output (rent, salaries)
Variable costs	Variable cost per unit × number of units
Total costs	Fixed costs + variable costs
Revenue (turnover)	Price per unit × quantity sold
Profit	Total revenue − total costs
Contribution per unit	Selling price per unit − variable cost per unit
Total contribution	Contribution per unit × number of units sold
Break-even output	Fixed costs ÷ contribution per unit
Margin of safety	Actual output − break-even output

Worked example. Emberfold Candles sells candles at £18 each. Variable cost is £7.50 per candle and fixed costs are £8,400 a month. It sells 1,150 candles a month.

Contribution per unit = 18 − 7.50 = £10.50
Break-even output     = 8,400 ÷ 10.50 = 800 candles
Margin of safety      = 1,150 − 800 = 350 candles
Revenue     = 18 × 1,150 = £20,700
Total costs = 8,400 + (7.50 × 1,150) = 8,400 + 8,625 = £17,025
Profit      = 20,700 − 17,025 = £3,675
Check: profit = margin of safety × contribution = 350 × 10.50 = £3,675

At 600 candles the business makes a loss: total contribution is 600 × 10.50 = £6,300, which is £2,100 short of fixed costs.

Interpreting the chart. A break-even chart plots revenue and total costs against output.

Output (candles)	0	400	800	1,200
Revenue (£)	0	7,200	14,400	21,600
Total costs (£)	8,400	11,400	14,400	17,400

The fixed-cost line is flat at £8,400. Total costs start at £8,400 and rise by the variable cost per unit. The lines cross at 800 candles and £14,400: break-even. The vertical gap between the lines is the loss (left of 800) or the profit (right of 800).

Manipulating the chart. If the price rises to £19.50, the revenue line becomes steeper, contribution rises to £12 and break-even falls to 8,400 ÷ 12 = 700 candles. If instead fixed costs rise to £9,240, the fixed-cost and total-cost lines shift up in parallel and break-even rises to 9,240 ÷ 10.50 = 880 candles. A rise in variable cost per unit makes the total-cost line steeper.

Significance. Break-even shows the minimum sales a plan needs and the margin of safety shows how far sales can fall before losses start. It assumes every unit is sold at one price and that costs are linear, so treat it as a planning guide. Pricing links to the Marketing study guide.

3.2.3.3 Profit and cash

Profit and profit margins

Profit is revenue minus costs. It rewards owners, funds growth through retained profits and signals to lenders and investors that the business is viable.

Gross profit     = Revenue − Cost of sales
Operating profit = Gross profit − Operating expenses
Net profit       = Operating profit − Interest − Taxes
Margin (%)       = Profit ÷ Revenue × 100   (for each level)

Worked example. Quarrymead Tiles Ltd: revenue £640,000; cost of sales £384,000; operating expenses £172,800; interest £9,600; taxes £16,000.

Gross profit     = 640,000 − 384,000 = £256,000   margin 256,000 ÷ 640,000 × 100 = 40%
Operating profit = 256,000 − 172,800 = £83,200    margin 13%
Net profit       = 83,200 − 9,600 − 16,000 = £57,600   margin 9%

The gap between a 40% gross margin and a 13% operating margin tells you overheads, not production costs, absorb most of the gross profit.

Profit vs profitability. Profit is an absolute figure; profitability measures profit relative to revenue (a margin). A firm earning £90,000 on £1.5 million revenue (6% margin) makes more profit but is less profitable than one earning £60,000 on £400,000 (15%).

Improving profit and profitability.

Method	Advantage	Challenge
Raise price	Higher margin per unit	Volume may fall if demand is price elastic
Cut variable costs	Every unit earns more	Cheaper inputs may lower quality
Cut fixed costs	Lower break-even	Fewer staff or less marketing can cut sales
Increase sales volume	Spreads fixed costs	Promotion costs money and may need capacity

Budgeting

A budget is a financial plan for a future period. Variance = actual figure − budgeted figure. A variance is favourable if it raises profit (revenue above budget, or costs below budget) and adverse if it lowers profit.

Worked example. Brackenmoor Bakery, one month:

Item	Budget (£)	Actual (£)	Variance (£)
Revenue	48,000	51,600	3,600 F
Ingredients	14,400	16,200	1,800 A
Wages	12,000	11,400	600 F
Rent	6,000	6,000	0
Profit	15,600	18,000	2,400 F

The profit variance equals the net of the others: 3,600 − 1,800 + 600 = 2,400 favourable. Higher sales partly explain the ingredients overspend, so interpret a variance before blaming anyone.

Value. Budgets set targets, allocate spending and help coordinate departments. Variance analysis shows where to act early. But budgets based on poor forecasts mislead, and rigid budgets can stop managers responding to opportunities.

Cash flow forecasts

Cash pays wages, suppliers and lenders when bills fall due; a profitable business can still fail if it runs out of cash. A cash flow forecast predicts monthly inflows and outflows. It shows when the business may need an overdraft, supports a loan application and lets managers plan.

Net cash flow   = Total inflows − Total outflows
Closing balance = Opening balance + Net cash flow
Opening balance = Closing balance from the previous period

Worked example. Copperleaf Bike Repairs, opening balance £2,500.

£	Month 1	Month 2	Month 3
Cash sales	5,000	4,600	7,400
Receipts from credit customers	4,000	3,800	5,200
Total inflows	9,000	8,400	12,600
Supplies	4,200	5,000	3,800
Wages	3,600	3,600	3,600
Rent and other	2,400	2,400	2,400
Total outflows	10,200	11,000	9,800
Net cash flow	(1,200)	(2,600)	2,800
Opening balance	2,500	1,300	(1,300)
Closing balance	1,300	(1,300)	1,500

Brackets show negatives. Month 2 closes £1,300 overdrawn, so Copperleaf should arrange an overdraft of at least that before month 2, or delay the large supplies order.

Timing: payables and receivables. Receivables are amounts customers owe the business; payables are amounts it owes suppliers.

Receivables days = Trade receivables ÷ Revenue × 365
Payables days    = Trade payables ÷ Cost of sales × 365

A firm with revenue £730,000, trade receivables £70,000, cost of sales £438,000 and trade payables £24,000 has receivables days of 70,000 ÷ 730,000 × 365 = 35 and payables days of 24,000 ÷ 438,000 × 365 = 20. It pays suppliers about 15 days before customers pay it, so it must finance that gap.

Improving cash flow.

Method	Advantage	Disadvantage
Debt factoring	Immediate cash for invoices	The factor keeps a fee, cutting profit
Shorter payment terms for customers	Cash arrives sooner	Customers may go to rivals
Early payment incentives	Encourages prompt payment	Discount reduces revenue
Credit checks	Fewer bad debts	Slower sales; some customers refused
Longer payment time to suppliers	Cash stays in the business longer	Suppliers may refuse or raise prices
Reducing outgoings	Lower outflows every month	Cuts can harm quality or capacity
Better invoice management	Invoices sent promptly and chased	Needs staff time or software

Common errors

• Dividing fixed costs by price instead of by contribution per unit.
• Rounding break-even down: 484.6 units means 485 must be sold.
• Using operating profit in the net profit margin.
• Calling every positive variance favourable; a cost above budget is adverse.
• Forgetting that each month’s opening balance is the previous closing balance.
• Treating profit and cash as the same: credit sales create profit before cash arrives.

Next: condense this with the revision notes, test yourself with the practice questions, and read how the 9625 and 9725 papers differ.

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.