OxfordAQA IGCSE Business: Finance (9225)

This guide covers section 3.6 Finance of the OxfordAQA International GCSE Business (9225) specification, version 3.1, for exams from May/June 2022 onwards. It follows the four parts of the section in order: 3.6.1 sources of finance, 3.6.2 cash flow, 3.6.3 financial terms and calculations, and 3.6.4 analysing the financial performance of a business. Finance is assessed in Paper 2, alongside marketing.

Related pages: the revision notes, the practice questions, the course hub, the printable checklist and the free 10-minute diagnostics.

Map of the topic

Section	What the specification asks you to do
3.6.1 Sources of finance	Understand internal and external sources; analyse advantages and disadvantages for a situation; evaluate suitability for new and established businesses
3.6.2 Cash flow	Explain why cash matters; understand consequences of cash flow problems; complete and interpret sections of a forecast; separate cash from profit; evaluate solutions
3.6.3 Financial terms and calculations	Fixed, variable and total costs; revenue, profit and loss; investment projects and payback period; break-even output and charts; margin of safety; value of break-even analysis
3.6.4 Financial performance	Purpose and components of financial statements; assets and liabilities; interpret income statements; gross and net profit margin; compare over time, against competitors and from stakeholder views

Briefest coverage here: investment projects and stakeholder perspectives. You will not be given formulae in an exam, so learn each one below.

3.6.1 Sources of finance

A business needs finance to start up, to grow and to cover day-to-day costs. Sources are internal (from inside the business) or external (from outside).

Source	Type	Advantage	Disadvantage
Retained profit	Internal	No interest, no new owners, no repayment	Only available once the business is profitable; amount may be small
Selling unwanted assets	Internal	Quick cash from items not in use	Only works once; the asset may sell below its value
Family and friends	External	Flexible terms, often cheap or free	May strain relationships; amounts are limited
New share issue	External	No repayment; can raise large sums	Ownership is shared; only for companies; dividends expected
Loan or mortgage	External	Large sum, fixed repayment plan	Interest cost; security may be needed; a mortgage is secured on property
Overdraft	External	Flexible, covers short-term gaps	Interest is high; the bank can withdraw it
Trade credit	External	Delays payment to suppliers, so cash stays in the business	Early-payment discounts may be lost; suppliers may refuse if payments are late
Crowdfunding	External	Many small backers; tests demand	Needs a convincing pitch; target may not be met; rewards or equity to give
Government and charitable grants/loans	External	Often cheap or free	Competitive; conditions attached; slow to arrive

Choosing a source

Match the source to three things: how much is needed, how long it is needed for, and the type of business.

• Short-term gaps (a late customer payment) suit an overdraft or trade credit.
• Long-term purchases (a building) suit a mortgage or loan, repaid over the life of the asset.
• A new business has no profit history, so it often relies on family and friends, crowdfunding, grants or a loan with security. It cannot use retained profit or a share issue to the public easily.
• An established business can use retained profit, loans (its record lowers the lender’s risk) and share issues.

Worked example. Juniper Row Bakery, trading for six years, wants £40,000 for a second oven line. It earns steady profit but has only £8,000 of retained profit set aside. Analysis: retained profit covers part of the cost with no interest. A loan for the remaining £32,000, repaid over five years, matches the long life of the ovens and the bakery’s record makes a lender willing. An overdraft would be a poor fit: it is meant for short gaps and its interest is high. Judgement: a mix of retained profit and a loan is most suitable because it limits borrowing and spreads repayment over the years the ovens earn money.

3.6.2 Cash flow

Cash is the money moving in and out of the business. Cash is needed to pay wages, suppliers, rent and bills on time. A profitable business can fail if it runs out of cash.

Consequences of cash flow problems

• It cannot pay suppliers, who may stop supplying or demand cash up front.
• It cannot pay wages, hurting motivation and risking staff leaving.
• It may need expensive borrowing, such as an overdraft.
• In the worst case the business is forced to close.

Positive cash flow (more cash in than out) lets a business pay bills on time, build a reserve, invest in growth and negotiate better terms.

Cash flow forecasts

A cash flow forecast predicts cash inflows and outflows over a future period, usually month by month. Businesses construct one to spot shortfalls early, to support a loan application and to plan. You are not expected to construct a whole forecast, but you must complete and interpret sections of one.

• Cash inflows: money received, such as cash sales, payments from customers, loans, owner investment.
• Cash outflows: money paid, such as wages, rent, materials, loan repayments.
• Net cash flow = cash inflows − cash outflows.
• Closing balance = opening balance + net cash flow.
• The closing balance of one month is the opening balance of the next.

Worked example. Hobsbourne Cycles forecasts three months.

	Jan	Feb	Mar
Opening balance	4,000	2,500	1,000
Cash inflows	9,000	7,500	8,000
Cash outflows	10,500	9,000	7,000
Net cash flow	−1,500	−1,500	1,000
Closing balance	2,500	1,000	2,000

Interpretation: net cash flow is negative in January and February, so the balance falls from 4,000 to 1,000. It recovers in March. The shop never goes overdrawn, but a small drop in sales in February would put it at risk.

Cash and profit are different

Profit = revenue − costs, counted when a sale is made. Cash is counted when money moves. Example: Hobsbourne Cycles sells £6,000 of bikes on credit in March and pays £4,000 for stock in cash. On paper that is a £2,000 profit, but cash falls by £4,000 until customers pay. A loan also brings in cash without being profit.

Solutions to cash flow problems

Solution	Evaluation
Re-scheduling payments (ask suppliers for longer)	Free and quick, but suppliers may refuse or charge more later
Overdraft	Immediate, flexible; interest is high
Reducing cash outflow (cut costs, delay purchases)	Within the firm’s control; may harm quality or growth
Increasing cash inflow (chase debtors, offer discounts for prompt payment, sell assets)	Improves cash directly; discounts cut profit
New sources of finance	Solves bigger gaps; adds cost or shares ownership

Evaluate by asking: how large is the gap, how long will it last, and which fix harms the business least?

3.6.3 Financial terms and calculations

• Fixed costs do not change with output (rent, insurance).
• Variable costs change with output (materials, packaging).
• Total costs = fixed costs + variable costs.
• Revenue = selling price × quantity sold.
• Profit = revenue − total costs. If negative, it is a loss.

Worked example. Cinderfield Jam Co has fixed costs of £12,000 a year, variable costs of £4 a jar and sells at £10 a jar. At 3,000 jars: revenue £30,000; variable costs £12,000; total costs £24,000; profit £6,000.

Break-even

Break-even output is the level of output where total revenue equals total costs: no profit, no loss. You will not be asked to draw break-even charts or use the break-even formula, but you must read and interpret charts.

A break-even chart has output on the horizontal axis and money on the vertical axis. Three lines appear: fixed costs (flat), total costs (starting at the fixed cost level and rising), and total revenue (starting at zero and rising more steeply). Cinderfield’s points:

Output (jars)	0	1,000	2,000	3,000	4,000
Total revenue	0	10,000	20,000	30,000	40,000
Total costs	12,000	16,000	20,000	24,000	28,000

The lines cross at 2,000 jars, so break-even output is 2,000 jars (revenue and costs both £20,000). Below it the gap between the lines is a loss; above it, a profit.

Margin of safety is the amount by which actual (or planned) output is above break-even output, read off the chart as a horizontal distance. At 3,000 jars, margin of safety = 3,000 − 2,000 = 1,000 jars.

Value of break-even analysis. For: simple to understand, shows the risk in a plan, helps with loan applications, shows the effect of changing price or costs. Against: assumes everything made is sold, assumes costs and price stay constant (bulk discounts and price cuts are ignored), and it is only as good as the forecast figures.

Investment projects and payback

Businesses invest in new machinery, buildings and vehicles. The payback period is the time taken for an investment to repay its cost from the net cash inflows it generates.

Worked example. Hobsbourne Cycles buys a repair machine for £60,000. Net cash inflows: year 1 £20,000, year 2 £25,000, year 3 £25,000, year 4 £30,000. Cumulative inflows: £20,000, £45,000, £70,000. After two years £15,000 is still to repay. Year 3 brings £25,000, so 15,000 ÷ 25,000 = 0.6 of the year, about 7 months. Payback period = 2 years 7 months. Value: a shorter payback means lower risk and faster return of cash. Limit: it ignores cash earned after payback and does not show overall profit.

3.6.4 Analysing the financial performance of a business

Financial statements record how a business is doing. They are used by owners, managers, lenders, investors, employees and others to judge performance and to decide, for example, whether to lend, invest or expand. Two are in the specification. The spec says exams use IASB terms, with an alternative in brackets where suitable, such as Statement of Financial Position (Balance Sheet).

Income statement

The income statement shows performance over a period (usually a year).

	Current year (£)	Previous year (£)
Revenue	240,000	200,000
Cost of sales	150,000	120,000
Gross profit	90,000	80,000
Expenses	60,000	52,000
Net profit	30,000	28,000

Gross profit = revenue − cost of sales. Net profit = gross profit − expenses (standard form; tax and interest are not shown here).

Statement of financial position

This is a snapshot at one point in time of what the business owns and owes.

• Assets: items of value the business owns or is owed. Non-current assets last over a year (buildings, vehicles); current assets are short-term (inventories, receivables, cash).
• Liabilities: what the business owes. Current liabilities fall due within a year (payables, overdraft); non-current liabilities are longer term (a loan).
• Equity: the owners’ stake, such as share capital plus retained profit.

Example (£): non-current assets 80,000; current assets 45,000 (total assets 125,000); current liabilities 30,000; non-current liabilities 40,000 (total liabilities 70,000). Net assets = 125,000 − 70,000 = 55,000. Equity: share capital 30,000 + retained profit 25,000 = 55,000.

Profit margins

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

	Current year	Previous year
Gross profit margin	90 ÷ 240 = 37.5%	80 ÷ 200 = 40%
Net profit margin	30 ÷ 240 = 12.5%	28 ÷ 200 = 14%

Making judgements

Compare current performance, performance against previous years, performance against competitors, and the view of each stakeholder. Here revenue rose 20% and profit rose in pounds, but both margins fell, so costs grew faster than sales. Owners may be pleased by higher profit; a lender may worry that margins are slipping; employees may hope for a pay rise but may fear cost cutting. A good answer weighs these and reaches a judgement.

Common errors

• Writing “profit” when the question asks about cash.
• Forgetting that the closing balance becomes next month’s opening balance.
• Dividing by cost of sales instead of revenue for margins.
• Treating the statement of financial position as covering a year; it is a snapshot.

Frequently asked questions

Which sources of finance can a new business use? A new business has no profit history, so it often relies on family and friends, crowdfunding, grants or a loan with security. It cannot easily use retained profit or a share issue to the public, unlike an established business.

What are the benefits of positive cash flow? Positive cash flow, with more cash coming in than going out, lets a business pay bills on time, build a reserve, invest in growth and negotiate better terms.

What is margin of safety? Margin of safety is the amount by which actual or planned output is above break-even output. On a break-even chart it is read off as a horizontal distance.

What are the limitations of break-even analysis? Break-even analysis assumes everything made is sold and that costs and price stay constant, ignoring bulk discounts and price cuts. It is only as good as the forecast figures it uses.

What is the difference between a current and a non-current asset? Non-current assets last for more than a year, such as buildings and vehicles. Current assets are short-term, such as inventories, receivables and cash.

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.