Cambridge IGCSE and O Level Business Studies

Section 5 – Mind maps

19  Business finance: needs and sources
Why businesses need finance

Why businesses
need finance

To replace worn out

To finance research
To provide To pay day-to-day or obsolete To invest in new To finance
and development
start-up capital business expenses non-current assets technologies expansion plans
into new products
such as machinery

Sources of finance
Sole traders and
Owner’s savings partnerships

Profit left after paying

Retained profit
taxes and dividends

Unwanted non-current
assets
Sale of non-current
Internal
assets
Sale and leaseback of
non-current assets

Cash balances

Using some of the

Reducing inventories
working capital

Reducing trade
receivables
Sources of finance

Overdraft

Short term Trade credit

Debt factoring

External Bank loan

Hire purchase

Leasing
Long term
Mortgage

Debenture

Share issue

© Cambridge University Press 2018 Section 5 – Mind maps 1

Cambridge IGCSE and O Level Business Studies

20  Cash-flow forecasting and working capital

Financing a short-term cash shortage

Financing short-term
cash shortages

Offer discounts to Use a different source

Negotiate longer
encourage credit Delay purchase of of finance for the
credit terms with Overdraft
customers to pay non-current assets purchase of non-
suppliers
more quickly current assets

© Cambridge University Press 2018 Section 5 – Mind maps 2

Cambridge IGCSE and O Level Business Studies

21  Income statements

The importance of profit to private sector businesses

The importance of
profit to a business

Profit is the difference

between revenue from
sales and the total costs
of making and
marketing sales

To make
To finance the purchase To attract investors to
To measure To measure the decisions about
of non-current assets provide additional
the success performance whether or not to
and business finance to finance
of a business of managers continue producing
expansion expansion
a product

The usefulness of profit data to stakeholders

A return for risking their

Owners/shareholders
investment in the business

May achieve higher wages

Employees
Improves job security

Will receive interest payments

Stakeholders are any group
that has an interest in the
activities of a business
Usefulness of profit data
to stakeholders
Lenders and repayment of amount
borrowed when it becomes due
Government Receives taxes on profits

Will receive payment for goods

supplied when due
Suppliers Increased profits suggest a
business which is selling more
and making more so will need
more supplies of raw materials

Compare performance of the

business with previous years or
Managers with that of competitors
Retained profits are an important
source of finance for a business

© Cambridge University Press 2018 Section 5 – Mind maps 3

Cambridge IGCSE and O Level Business Studies

22  Statement of financial position

Main parts of a statement of financial position

Land, buildings, machinery,

Non-current assets
motor vehicles
Assets – items that are
owned by a business
Inventories, trade
Current assets receivables, cash and bank
balances

Main features of a statement

of financial position Trade payables, overdraft,
Current liabilities
taxation, dividends

Liabilities – items that are

Non-current liabilities Long-term borrowing
owed by a business

Money invested by
Owner’s equity owners/shareholders plus
retained profits

© Cambridge University Press 2018 Section 5 – Mind maps 4

Cambridge IGCSE and O Level Business Studies

23  Analysis of accounts

Interpreting financial statements

(gross profit / revenue) ×

Gross profit margin
100%

Measuring business
Profit margin (profit / revenue) × 100%
performance

(profit / capital employed)

Return on capital employed
Analysing financial × 100%
statements

Current assets / current

Current ratio
liabilities
Measuring business
liquidity
(current assets −
Acid test ratio
inventories) /
current liabilities

© Cambridge University Press 2018 Section 5 – Mind maps 5