Business Finance

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Why is funding needed?

  • To cover start up costs
  • Expand
  • Cash flow forecasts
  • Wanting to buy more raw materials to complete a big order

Amount of funding depends on a few things:

  • Type of business format
  • Size of business
  • State of the economy

Sources of finance:


  • Retained profit
  • Owner's capital
  • Asset sale


  • Interest free
  • More likely to receive family investment than from the bank
  • No need to wait for funding
  • Source of money cannot be withdrawn


  • Always an opportunity cost
  • Limited finance
  • Risk losing everything
  • Strained personal relationships


  • Lottery funding (Long Term)
  • Government grant (Long Term)
  • Mortgage (Long Term)
  • Bank loan (Short term)
  • Shares (Long Term)
  • Overdraft (Short term)
  • Debentures (Long term)

Forming a Company

PLCs and LTDs: Articles of Association and Memorandum of Association

Unlimited Companies: Only have to tell the HMRC and National Insurance Office

Internal Sources of Finance

Retained profits: (+VE: No interest, immediatly available), although there is an opportunity cost.

Credit control: (+VE: Improves cash flow, although it can be expensive, poor customer/business relationships)

Fixed assets: (+VE: Immediate available, although you may be lacking resources, you can rent them back


Measuring success in a business:

  • Profit
  • Share price
  • Revenue
  • Motivation
  • Productivity
  • Absenteeism

Gross Profit= Sales revenue-Variable cost. Just for shareholders, ignores fixed costs

Operating/Net Profit= Sales revenue- Total Costs. Gives a true representation of actual profit.

Operating Profit Margin (£)= Operating profit/Sales revenue *100

Return on Capital: Operating Profit/ Capital invested * 100


  • The point at which a business makes neither a profit nor a loss i.e. where revenue equals total costs
  • BEP (output) = Fixed costs/ (Selling price-variable costs)



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