5.1 Business AS finance
- Syllabus
- 9609–2026–2027
- Topic
- 5.1
- Level
- AS
Learning objectives
5.1.1Need for finance• The need for business finance- reasons why businesses need finance to start up, to grow and to survive- the distinction between short and long term need for finance- the difference between cash and profits- business failure as a consequence of lack of finance: bankruptcy, liquidation and administration5.1.2Working capital• Working capital- the meaning and importance of working capital- managing trade receivables and trade payables- the distinction between capital expenditure and revenue expenditure
Business finance must match purpose, timing and survival risk
| Need | Typical uses | Why the timing matters |
|---|---|---|
| Start up | Premises/equipment, opening inventory, research, legal setup, launch promotion and cash before first receipts | Large payments occur before trading cash becomes regular |
| Grow | Extra capacity/site/equipment, product/market development, recruitment, inventory and promotion | Long-lived investment and a larger working-capital gap may arise together |
| Survive/operate | Wages, suppliers, rent/utilities, repairs, seasonal/late-payment gaps, emergencies and recession reserves | Obligations fall due even when sales/profit weaken or customer cash is delayed |
| Finance need | Broad horizon and fit | Examples |
|---|---|---|
| Short term | Usually within one year; temporary/trading need that should not be financed longer or more expensively than necessary | Working capital, seasonal inventory, delayed receivables, emergency cash |
| Long term | More than one year; durable asset or strategic capacity whose benefits/repayment extend over years | Premises, machinery, major expansion or product development |
| Cash | Profit |
|---|---|
| Actual money received and paid; cash balance depends on timing | Revenue minus expenses for a period under accounting recognition |
| Credit sale creates no cash until customer pays; asset purchase/loan movements affect cash | Credit sale can create revenue/profit before payment; buying a non-current asset is not normally the whole period's expense |
A retailer sells 20,000on60−daycreditandrecordsaprofit,butwagesandsuppliersrequire15,000 this week. Until customers pay or finance fills the gap, the business lacks cash despite profit. Persistent inability to pay debts when due can stop supplies/work and trigger insolvency procedures.
| Outcome | Core meaning in financial distress |
|---|---|
| Bankruptcy | A legal process/status when an individual or unincorporated business cannot repay outstanding debts; assets/income may be used for creditors |
| Liquidation | A company is wound up: assets are sold and proceeds distributed to creditors in legal order, normally ending trade |
| Administration | An administrator takes control to try to rescue the company as a going concern or achieve a better result for creditors than immediate liquidation |
Lack of finance can prevent adequate start-up assets/marketing, interrupt wages and supplies, block maintenance/innovation/growth or remove the reserve needed for a shock. Trace the consequence: unpaid supplier → credit withdrawn/supply stops → output/sales fall → cash shortage deepens → failure risk rises.
Profit does not settle a bill—cash does. Finance need is not only a growth issue, and bankruptcy, liquidation and administration are distinct legal responses rather than interchangeable words.
Working-capital management keeps the trading cycle liquid
Working capital=current assets−current liabilities
Current assets are expected to become cash or be used within about one year, such as cash, inventory and trade receivables (customers' unpaid credit purchases). Current liabilities fall due within about one year, such as trade payables, overdrafts and short-term debt. Net working capital supports day-to-day trading and short-term obligations.
The cycle is cash → pay/buy inventory and operating inputs → sell goods/services → create cash sales or trade receivables → collect customer cash → pay trade payables and other current liabilities. Longer inventory holding or customer collection delays lengthen the funding gap; supplier credit can partly bridge it.
| Area | Actions | Trade-off/risk |
|---|---|---|
| Trade receivables | Credit checks/limits, clear terms and invoices, prompt collection, early-payment discount, stop poor-risk credit or debt factoring | Tighter terms improve cash but may reduce sales/customer loyalty; discount/factoring has a cost |
| Trade payables | Negotiate longer credit/instalments, schedule payment at due date and coordinate purchases with cash receipts | Delaying too far can lose discounts/trust/supply, worsen terms or trigger legal action |
| Inventory/cash | Forecast demand/cash, reduce slow/excess stock, improve reorder/JIT reliability and maintain a suitable cash buffer | Too little stock/cash risks disruption and lost sales; too much ties up funds and raises holding/opportunity cost |
Too little liquid working capital can prevent payment of wages, suppliers and bills, damaging supply and causing insolvency even when profitable. Excess working capital may signal idle cash, slow receivables or obsolete inventory, sacrificing return/growth. Judge asset quality and cash timing, not only a positive snapshot.
| Capital expenditure | Revenue expenditure |
|---|---|
| Purchase or improvement of a non-current asset expected to benefit the business for more than one year | Day-to-day operating spending whose benefit is consumed within the current period/trading cycle |
| Examples: premises, machinery, vehicles, major equipment upgrade | Examples: wages, rent, utilities, inventory supplies, routine repairs and maintenance |
| Creates/improves a long-lived asset; financed and planned for a long horizon | Keeps existing operations/assets running; recurring and directly affects current operating cost/profit |
Working capital is not cash alone, and a larger positive number is not automatically healthier. Trade receivables are owed to the business; trade payables are owed by it. Routine repair is revenue expenditure, while buying or materially improving a long-lived asset is capital expenditure.