Paper 2

• Purpose of the Finance function

  • Provide financial information
  • Support business planning and decision making
• Provide financial information

  Break-even
• Finance function's responsibility

  Applying for loans and other finances to help the business meet its objectives
• Finance function's responsibilities

  1. Calculating the break-even of the business

  2. Ensuring the business has enough money to continue trading

  3. Negotiating loans to expand

  4. Ensuring all tax is paid and the business complies with relevant financial rules
• Importance of the finance function

  • Helps the business write its business plan
  • Provides data for cash flow forecasts and profit and loss calculations
  • Advises on project progress and any potential risk of business decisions costing too much money
• Business decisions are only as good as the data they are based on
• The finance function needs to make sure there is a constant stream of relevant and accurate data which the managers can use to make decisions
• What the finance function lets the team know the budget for

  • Raw materials
  • Components
  • New machinery
  • New premises
  • Machine parts
  • Equipment
• What the finance function influences for marketing

  • Advertising
  • Promotions
  • Market research
  • Social media
  • New product development
• What the finance function influences for human resources

  • Recruitment
  • Interviews
  • Job adverts
  • Training staff
  • Pay rises
• Reasons businesses need finance

  • Establishing a new business
  • Funding expansion
  • Running the day-to-day business
• When a business starts up it needs finance for

  • Buying stock
  • Buying fixtures and fittings for the shop
  • Paying the rent
  • Hiring staff
• When a business is established it may need finance to

  • Expand by opening another location
  • Expand into a nearby shop to serve more customers
• Businesses sometimes make a loss, especially during a recession, but this does not mean they will go bust or close
• Businesses may borrow finance and carry on until the economy picks up
• Reasons a business may need to recruit new employees

  • Expanding
  • Replacing someone who has left or retired
• Reasons a business may start a new marketing campaign

  • New promotion
  • Competition
  • Sale
  • Discount or other method
• Ways of raising finance

  • Loan
  • Overdraft
  • Trade credit
  • Retained profit
  • Sale of assets
  • Owner's capital
  • New partner
  • Share issue
  • Crowdfunding
• Loan

  • Issued by a bank
  • May require some security
  • Interest must be paid back on top of the amount borrowed
  • Most business loans are for 10 years
  • Fixed monthly payments help the business budget and plan
• Pros of a loan

  • Can help with all costs of setting up a business
  • The longer the term, the lower the monthly interest payments
  • Spreading the cost over a longer period
• Cons of a loan

  • The amount of interest depends on individual circumstances
  • The business must pay back some of the loan and interest each month even if making a loss
• Overdraft


  • Short-term finance organised by the bank
  • Can be used for a single day if the business has a temporary cash flow problem
  • Interest is only paid on the amount of the overdraft used
• Pros of an overdraft

  • Extremely flexible
• Cons of an overdraft

  • Interest rate is usually higher than for a loan
  • Banks can demand immediate repayment
  • Banks may refuse to give an overdraft until the business is established
• Trade credit


  • The seller gives the buyer 30, 60, or 90 days to pay
  • The buyer then has time to sell the goods in their own shop before paying the supplier
  • The wholesaler may give the buyer a discount for using cash instead
• Pros of trade credit

  • The business will never run out of products to sell
• Cons of trade credit

  • The supplier may charge a higher cost for the products
  • If this is the first year the business has asked for trade credit, the supplier may say no
• Retained profits

  Profits that a well-run business can reinvest into the business to help it grow
• Pros of retained profits

  • No interest to pay, so it's the cheapest method of finance
  • Access to the funds can be quick and easy as they are already in the owner's account
• Cons of retained profits

  • The retained profits cannot be used for any other purpose
  • Not applicable in the first year of trading as the business has not made any profits to retain
• Sale of assets

  A business sells machinery, vehicles, equipment, furniture, premises, or land to raise cash quickly
• Pros of selling assets

  • A good way to raise cash quickly in the business
  • There is a good market for second-hand business machinery, equipment and vehicles
• Cons of selling assets

  • The business will no longer have the benefit of that asset
  • It will impact the business's statement of financial position, which may put off potential investors
• Owner's capital

  The owner uses their personal savings, loans, or credit cards to finance the business
• Pros of owner's capital

  • Easy access to the money through the owner's bank accounts
  • No complicated paperwork
  • No interest to pay