OxfordAQA IGCSE Business: Finance (9225) – Revision Notes

These notes condense section 3.6 Finance of the OxfordAQA International GCSE Business (9225) specification, version 3.1 (exams from May/June 2022 onwards). For full explanations and worked examples, read the study guide. Then test yourself with the practice questions, tick off the printable checklist, and see the course hub or the free 10-minute diagnostics.

Map of the topic

• 3.6.1 Sources of finance
• 3.6.2 Cash flow
• 3.6.3 Financial terms and calculations (costs, break-even, payback)
• 3.6.4 Analysing the financial performance of a business

You will not be given formulae in an exam. You will not be asked to draw break-even charts or use the break-even formula, nor to construct an entire cash flow forecast.

3.6.1 Sources of finance

Source	Internal or external	Best for	Main drawback
Retained profit	Internal	Any firm already making profit	Limited amount
Selling unwanted assets	Internal	Raising cash from idle items	One-off
Family and friends	External	Start-ups	Relationship risk
New share issue	External	Companies needing large sums	Ownership diluted
Loan or mortgage	External	Long-term purchases	Interest; security
Overdraft	External	Short-term gaps	High interest
Trade credit	External	Delaying supplier payment	Lost discounts
Crowdfunding	External	Ideas that appeal to the public	Target may not be met
Government and charitable grants/loans	External	Start-ups, targeted projects	Conditions; slow

Method for “evaluate suitability”:

1. State the amount needed and the time period.
2. Say whether the firm is new or established.
3. Give one advantage and one disadvantage in this context.
4. Make a judgement and give a reason.

Must-know distinction: new businesses have no track record, so lenders see more risk; established businesses have profit history, assets and credibility.

3.6.2 Cash flow

• Cash flow problems lead to late payment of suppliers and wages, costly borrowing and possible closure.
• Positive cash flow allows bills to be paid, reserves to build and investment.
• Forecasts are built to spot shortfalls early, support loan applications and plan.

Term	Meaning
Cash inflows	Money coming in
Cash outflows	Money going out
Net cash flow	Inflows − outflows
Closing balance	Opening balance + net cash flow
Opening balance (next month)	Previous closing balance

Small reminder: opening 2,000, inflows 6,500, outflows 7,200. Net cash flow = −700. Closing balance = 1,300.

Cash versus profit

• Profit = revenue − costs, recognised when the sale is made.
• Cash is recognised when money moves.
• A firm can be profitable but short of cash (sales on credit, stock bought in advance, equipment bought outright).
• Loans raise cash, not profit.

Solutions (evaluate each):

Solution	Plus	Minus
Re-schedule payments	Free, quick	Suppliers may refuse
Overdraft	Immediate	Interest high
Reduce cash outflow	Under the firm’s control	Quality or growth may suffer
Increase cash inflow (chase debtors, prompt-payment discount, sell assets)	Direct effect	Discounts cut profit
New sources of finance	Covers large gaps	Cost or shared ownership

Judge by the size and length of the gap, the cost, and side effects.

3.6.3 Financial terms and calculations

Term	Formula or meaning
Fixed costs	Do not change with output
Variable costs	Change with output
Total costs	Fixed + variable
Revenue	Price × quantity sold
Profit or loss	Revenue − total costs
Break-even output	Output where revenue = total costs
Margin of safety	Actual or planned output − break-even output
Payback period	Time for net cash inflows to repay the cost

Small reminder: 5,000 units at 6 each give revenue 30,000. Fixed costs 9,000 plus variable 2.50 × 5,000 = 12,500 give total costs 21,500. Profit = 8,500.

Reading a break-even chart

1. Find the total revenue line and the total costs line.
2. The crossing point is break-even. Read its output on the horizontal axis.
3. The gap between the lines left of that point is loss; to the right, profit.
4. Margin of safety is the horizontal distance from break-even to actual output. Example: break-even 800 units, planned 1,100 units: margin of safety 300 units.

Value of break-even analysis: simple; shows risk; helps with loans and pricing decisions. But it assumes all output is sold, price and costs constant, and forecasts are accurate.

Payback steps

1. Add yearly net cash inflows to make a running total.
2. Find the year in which the total passes the cost.
3. Part-year = amount still to repay ÷ that year’s inflow, times 12 for months.

Example: cost 24,000; inflows 8,000, 12,000, 15,000. After two years 20,000. Remaining 4,000 ÷ 15,000 = 0.27 years, about 3 months. Payback = 2 years 3 months. Investments include machinery, buildings and vehicles. Advantage: quick to calculate and shows risk. Limit: ignores cash after payback.

3.6.4 Financial performance

Purpose of financial statements: show how a business is doing; help owners, managers, lenders, investors and others decide.

Statement	Shows	Time frame
Income statement	Revenue, cost of sales, gross profit, expenses, net profit	A period
Statement of financial position (Balance Sheet)	Assets, liabilities, equity	A snapshot at one date

• Assets: owned or owed to the business (non-current and current).
• Liabilities: owed by the business (current and non-current).
• Net assets = total assets − total liabilities.

Ratio	Formula
Gross profit margin	Gross profit ÷ revenue × 100
Net profit margin	Net profit ÷ revenue × 100

Small reminder: revenue 80,000; cost of sales 52,000; gross profit 28,000, margin 35%; expenses 20,000; net profit 8,000, margin 10%.

Layout reminder for an income statement, top to bottom: revenue, less cost of sales, equals gross profit, less expenses, equals net profit. For the statement of financial position: non-current assets plus current assets, less current and non-current liabilities, equals net assets, which equal equity.

Stakeholder	Likely interest in the figures
Owners and shareholders	Profit and returns
Lenders	Ability to repay
Employees	Job security and pay
Suppliers	Whether they will be paid
Competitors	Margins to compare with their own

Judging performance by four comparisons: current performance, previous years, competitors, and the view of each stakeholder (owner, lender, employee, supplier and others).

Linking the parts

Finance questions often join sections. A firm short of cash (3.6.2) may need an overdraft or loan (3.6.1). A break-even result (3.6.3) can support a loan request. Falling margins (3.6.4) may explain weak cash flow, because costs are taking more of each sale. Use these links to build analysis chains in longer answers.

Command words in finance questions

• State, identify, define: one short fact, no explanation.
• Calculate: show the formula or working, then the answer with units.
• Explain, analyse: make a point and develop it with because or so.
• Evaluate, justify, recommend: weigh both sides, link to the business in the case, and reach a reasoned judgement.

Quick self-test

1. Name two internal sources of finance.
2. A firm has an opening balance of 3,500, inflows of 9,000 and outflows of 10,200. State the closing balance.
3. Define fixed costs and give one example.
4. Output is 5,000 units, price 6, fixed costs 9,000, variable cost 2.50 a unit. Calculate profit.
5. Break-even output is 800 units and planned output is 1,100 units. State the margin of safety.
6. A project costs 30,000 and returns 10,000 net cash inflow a year. State the payback period.
7. Revenue 80,000 and gross profit 28,000. Calculate gross profit margin.
8. Why is the statement of financial position called a snapshot?
9. Give one reason a profitable business may run out of cash.
10. Give one advantage and one drawback of an overdraft.

Answers

1. Retained profit; selling unwanted assets.
2. 3,500 + 9,000 − 10,200 = 2,300.
3. Costs that do not change with output, such as rent.
4. 30,000 − 21,500 = 8,500.
5. 1,100 − 800 = 300 units.
6. 30,000 ÷ 10,000 = 3 years.
7. 28,000 ÷ 80,000 × 100 = 35%.
8. It shows assets and liabilities at one date only, not over a period.
9. Customers pay late while suppliers and wages must be paid now.
10. Flexible and quick for short-term gaps; interest is high and the bank can withdraw it.

Where marks are usually lost

• Using profit figures when the question asks about cash, or the reverse.
• Forgetting to carry the closing balance forward as the next opening balance.
• Reading break-even at the wrong axis: output is horizontal, money is vertical.
• Quoting a margin of safety in money when the chart question asks for output, or the reverse.
• Stopping the payback calculation at whole years and ignoring the part-year.
• Dividing by cost of sales instead of revenue for margins.
• Listing a source of finance without saying why it suits this business.
• Evaluating with no judgement at the end.
• Describing a statement of financial position as covering a year.

Frequently asked questions

Are formulae given in the OxfordAQA IGCSE Business exam? No. In OxfordAQA International GCSE Business (9225) you will not be given formulae, so you need to learn them. You will not be asked to draw break-even charts or use the break-even formula, nor to construct an entire cash flow forecast.

Why do new businesses find it harder to raise finance? New businesses have no track record, so lenders see more risk. Established businesses have a profit history, assets and credibility, which makes borrowing easier.

How do you calculate the payback period? Add the yearly net cash inflows to make a running total and find the year in which the cost is recovered. For the part-year, divide the amount still needed by that year’s inflow and convert it into months.

How do you judge a business’s financial performance? Use four comparisons: current performance, performance against previous years, performance against competitors, and the view of each stakeholder, such as owners, lenders, employees and suppliers.

Official syllabus

OxfordAQA International GCSE Business (9225), version 3.1, first teaching September 2020, first examined May/June 2022, section 3.6 Finance. Published by OxfordAQA.