Cambridge IGCSE and O Level Business Studies

19 Business finance: needs and sources

Answers to Coursebook activities
Case study (pages 245–246)
a The capital needed when first setting up a business to purchase/rent premises and buy inventories.
b Ingredients used in drinks, wages.
c Money spent on buying non-current assets such as a refrigerated truck.
d To expand her business. This is not available from her profits so she is borrowing money from a bank or
other lender.

Activity 19.1 (page 246)

1 Premises, machinery/equipment, raw materials, other items used in making clothing, vehicle, office
equipment, shop fittings, etc.
2 Premises, machinery/equipment, raw materials, vehicle, shop fittings.
3, 4 and 5 Student’s own answer.

Test yourself (page 246)

1 Start-up capital, expansion, temporary cash shortage.
2 Short-term finance is needed for less than one year. Long-term finance is needed for more than one year.

Activity 19.2 (page 248)

1 Land and buildings do not usually decrease in value. Buildings can be used over and over again for
different purposes. Machinery loses value over time – becomes less efficient with use and eventually
no longer works. Most machines can only be used for one purpose, and are often replaced with better
technology.
2 Computers go out of date very quickly because technology is constantly changing. A three-year-old
motor vehicle will have a useful life that is much longer than that of three-year-old computers.
3 Machinery might have a specific use and be of no use to other businesses. The machine might have
been replaced with better technology in the last three years and buyers of such machinery will want to
purchase the ‘best’ technology available if they are able to afford to do so.

Case study (page 249)

a Not made a profit in the last two years so insufficient internal sources of finance. Long-term debt that
it needed to finance, i.e. had to pay interest on loans or repay some loans. If not making profit then
borrowing needed to be financed from other sources, e.g. selling assets.
b If assets not being used then probably a good way to raise finance to pay off some debts. Assets might
have been costing Cemex money to keep them, e.g. maintenance of empty buildings. However, if assets
might have been used by Cemex in future then not such a good idea because it will have to purchase
new assets in future, which will be more expensive than the assets sold. Cemex had large debts so it
might have been very difficult to raise finance through more borrowing – selling assets perhaps only
option. However, if assets sold included land/buildings then it might have been able to borrow from
banks/other lenders and used land/buildings as collateral. Advantage for Cemex – would still own asset
for future use. Disadvantage – Cemex would have to pay interest on new loans but not likely to be able
to do this as not making profits.

© Cambridge University Press 2018 Chapter 19 Answers to Coursebook activities 1

Cambridge IGCSE and O Level Business Studies

Activity 19.3 (page 250)

1 Purchase would use all the cash available and leave IE with zero cash balance to pay for day-to-day
expenses. Would need an overdraft for expenses, which would increase IE’s costs.
2 If delivery of raw materials from suppliers is late, or delivery is less than the quantity ordered or
damaged, then IE would not have raw materials needed for production. If unable to produce goods,
unable to supply customers on time – lose sales and reduce IE’s profits.
3 If IE reduces inventory and then there is an increase in demand for products, IE might not be able to
supply customers. This could lose not only this sale but also future sales.
4 IE is owed money from its trade receivables; $12 000 is from customers who have had goods for over
30 days but have not yet paid for these. Improving credit control and recovering these debts more
quickly would increase IE’s cash balances. However, this will not finance the whole $14 000 needed, so
could reduce inventories of raw materials and finished goods by a smaller amount than the directors
suggested. IE could consider just-in-time inventory management. However, this will take time to
organise so is probably a more long-term solution to improving working capital.

Activity 19.4 (page 252)

•• Lost discount will increase business costs. Might have to increase prices, which makes them less
competitive.
•• Refusing to deliver supplies might result in halting production. If the business cannot produce goods
then it will not have them to sell. It could lose sales and suffer lower profits.
•• Demanding payment when the order is placed will reduce cash that the business has to meet its other
day-to-day expenses. This reduction in working capital could result in the business needing to use an
overdraft – which increases costs.

Case study (page 255)

a Had idea for business. Always looking for other business opportunities. Presumably she finances other
business ideas from the profits of her original business, which means she is prepared to risk her own
money in business ventures.
b New businesses at much greater risk of failing and not being able to repay money borrowed. Banks
consider them to be too great a risk and are reluctant to lend money to them, especially when the
entrepreneur is not investing their own money or has no assets to use as security against bank loans.
c Yes, because she is earning profit that supports her family and has enough left over to finance other
business ideas.

Test yourself (page 256)

1 Internal finance is raised from within the business, e.g. profit, working capital and the sale or sale and
leaseback of non-current assets. External finance is obtained from sources outside of the business, e.g.
share issue, borrowing from banks and other lenders.
2 Earned by the business through activities; has no cost to the business as a source of finance.
3 Size of business, business’s legal form, amount required, existing borrowing, how long finance is needed for.
4 Find it easier to borrow money because seen as less risky than small businesses. Larger businesses often
have assets they can use as security to obtain loans. Banks often charge a lower rate of interest on loans
to larger businesses than on loans to smaller businesses.

Exam-style practice questions (page 257)

1 a External source of finance. Interest is payable on the amount borrowed and the capital amount must
be repaid at the end of the loan term. [2]
b Interest charge/cost and loan has to be repaid. [2]
© Cambridge University Press 2018 Chapter 19 Answers to Coursebook activities 2
Cambridge IGCSE and O Level Business Studies

c Recent profits of business (1), bank will need to be certain that the business is making enough
profit to be able to pay the interest on any loan and repay the loan at the end of the loan period (1).
Or forecast profit/how much profit George expects to earn from expansion plans (1). Helps bank
to measure risk of loan/will George’s plans increase profits enough to repay amount borrowed (1)?
[Total: 4]
d Leasing (1), premises and machinery could be paid for on a monthly or quarterly basis (1), the cost of
the lease is paid monthly or quarterly and George should be able to do this from internal sources (1).
Government grants (1), governments often help small businesses such as George’s by providing low
interest or interest-free grants (1), OR grants that do not have to be repaid (1). (Do not reward marks
for both). This source of finance is much cheaper than borrowing from banks (1). [Total: 6]
e Advantages: Winston brings capital to business (1), has skills needed to help in George’s expansion
plans (1), can help with the running of the business – which reduces George’s workload (1).
Disadvantages: George must share profits with Winston (1), George no longer has total control over
business decisions (1). Statement as to whether or not George should enter into partnership with
Winston based on advantages and disadvantages (1). [Total: 6]
2 a Limited liability, cannot sell shares to the public. [2]
b Spending on purchase of non-current assets, e.g. machinery, vehicles. [2]
c Retained profits (1), current year’s profit earned by BSE could be kept in the business and used to
finance the new machine (1); Sale of unwanted assets (1), BSE might have land or buildings it doesn’t
use or need, which could be sold to raise money for the purchase of the machine (1). [Total: 4]
d Existing borrowing (1), if BSE already has loans then it needs to think about whether or not it can
afford interest charges for further loans (1), banks might want collateral as security against further
borrowing (1). Does BSE want to own the machine (1)? If so then a bank loan might be the best
option, if not then it could consider leasing the machine (1), both sources have interest payments but
a bank loan has to be repaid at the end of the loan period, whereas a lease spreads the cost over the
lease term (1). [Total: 6]
e Leasing: cost is spread over the period of the lease so no large repayment at the end (1), BSE will not
own the machine (1), leasing company may be responsible for maintenance/repairs, which reduces
BSE’s costs (1). Debenture: interest charges and the amount must be repaid at the end of the loan period
(1), BSE will own the machine (1). Statement as to which is the best method and why based on points
discussed (1). [Total: 6]

© Cambridge University Press 2018 Chapter 19 Answers to Coursebook activities 3