iGCSE Business Studies 5.1.1 The need for business finance

Learning Outcomes The main reasons why businesses need finance Understand the difference between short-term and long-term finance needs

Capital Versus Revenue Expenditure Capital Expenditure Revenue Expenditure Capital expenditure occurs when a business gets a long term advantage due to that expenditure. Often the purchase of an asset Expenditure which is not for increasing the value of fixed assets, but for running the business on a day to day basis.

4 reasons finance is needed Start-up Cash flow Renewal Expansion

Reasons for Finance 1: Start-up Finance will be needed when the business first starts Start-up costs can involve capital and revenue expenditure Task A new restaurant is opening What would they need to spend money on in the first month of operation? Write a list

Fixtures and fittings £10,000 Capital or Revenue Expenditure? Utility Bills £300 Fixtures and fittings £10,000 Premises £300,000 Computer £300 Wage Costs £600 Stock £1,000 Decorators £1,500 Kitchen Equipment £15,000 Van £12,000

Reasons for Finance 2: Cash Flow Cash flow refers to the money that a firm needs in order to pay it’s running costs Cash flow means financing revenue expenditure Task Write a list of the revenue expenditures that a firm is likely to have over the period of a month

Reasons for Finance 3: Renewal Assets that the business owns will need replacing. Renewal will involve Capital Expenditure Questions What are the main reasons why assets will need to be replaced? What types of assets is a business likely to have to replace?

Reasons for Finance 4: Expansion If the business wants to increase in size then it will have to invest in new assets/businesses Expansion involves Capital Expenditure

Long term vs Short term needs How long do businesses need money for? Long term vs Short term needs

Short-term finance needs Business needs finance for a short period of time Tends to be relatively small amount Tends to be for revenue expenditure

Long-term finance needs Business needs finance for a big project or major purchase Large amounts of finance are needed Generally for capital expenditure

Task – 10 mins Open the document ‘The need for finance’ Answer the questions

Learning Outcomes The main reasons why businesses need finance Understand the difference between short-term and long-term finance needs