Business finance: Edexcel IGCSE Business Complete Notes

Where the money comes from and where it goes

Business finance is one of those topics that feels intimidating until you break it down into its parts. And once you do, you realise it is mostly common sense dressed up in formal vocabulary. Every business needs money to start, to run, and to grow. The Business finance section of the Pearson Edexcel IGCSE (4BS1) Business specification covers where that money comes from, how to track it, how to work out whether a business is making or losing money, and how to measure financial health. If you get comfortable with these ideas, a solid chunk of both exam papers becomes much more manageable.

These edexcel igcse business revision notes cover all five topics in Section 3. Whether you are working through the edexcel igcse business business finance content for the first time or doing a final review before the exam, the concepts here connect directly to the calculations and analysis questions that appear regularly on both papers.

Business finance - sources

The first question any business faces is: where does the money come from? The answer depends on how much is needed, how quickly, and what stage the business is at.

Why businesses need finance

Short-term needs - paying wages this month, buying stock, covering an unexpected bill. The money is needed quickly and paid back soon.
Long-term needs - buying premises, investing in new machinery, expanding into a new market. These require larger amounts over a longer period.
Start-up or expansion - a new business needs capital to get going. An existing business needs capital to grow.

Internal sources of finance

These come from within the business itself:

Personal savings - the owner's own money. Common for sole traders starting out. The advantage is no interest to pay and no loss of control. The risk is personal.
Retained profit - profit that the business has earned and kept rather than distributing to owners or shareholders. This is the most common source of finance for established businesses. It costs nothing to borrow and does not dilute ownership. But it is only available if the business has been profitable.
Selling assets - disposing of equipment, vehicles or property the business no longer needs. It raises a lump sum but reduces the business's asset base.

External sources of finance

These come from outside the business:

Source	How it works	Best suited for
Overdraft	The bank allows the business to spend more than its account balance, up to a limit. Interest is charged on the amount overdrawn.	Short-term cash flow gaps
Trade payables (trade credit)	Suppliers allow the business to receive goods now and pay later (typically 30-60 days).	Short-term stock purchases
Loan capital	Borrowing a fixed amount from a bank, repaid with interest over an agreed period.	Medium to long-term investment
Share capital	Selling shares in the company to investors. For PLCs, this includes stock market flotation.	Large-scale expansion (limited companies only)
Venture capital	Investment from specialist firms or individuals who provide funding in exchange for equity and often a say in how the business is run.	High-growth start-ups and expanding businesses
Crowdfunding	Raising small amounts from many people, usually through online platforms like Kickstarter or Crowdcube.	Start-ups, creative projects, businesses with a strong story

Exam tip: When the exam asks you to recommend a source of finance, never just name one. Explain why it suits the specific business in the scenario. A sole trader cannot sell shares. A start-up with no track record is unlikely to get a large bank loan. A business that needs cash for two weeks does not need a five-year loan. Match the source to the situation.

Cash flow forecasting

Cash is the lifeblood of a business. You might have heard the saying "cash is king," and in business, it is absolutely true. A business can be profitable on paper and still fail if it runs out of cash. Profit and cash are not the same thing.

The difference between cash and profit

Profit is what remains after all costs are deducted from revenue over a period (say, a year). Cash is the actual money available right now. A business might sell 10,000 GBP worth of goods in January but not receive payment until March. On paper, January was profitable. In practice, the business has no cash to pay February's bills. That gap is where businesses fail.

Reading a cash flow forecast

A cash flow forecast predicts the money coming in and going out over a future period. It has four key components:

Cash inflows - money coming into the business (sales revenue, loans received, capital invested)
Cash outflows - money leaving the business (rent, wages, stock purchases, loan repayments)
Net cash flow - inflows minus outflows for the period. A positive net cash flow means more money came in than went out. A negative figure means the opposite.
Opening and closing balances - the opening balance is how much cash the business had at the start of the period. The closing balance is the opening balance plus (or minus) the net cash flow. The closing balance of one month becomes the opening balance of the next.

The business finance edexcel igcse exam often gives you a partially completed cash flow forecast and asks you to fill in missing values. Get comfortable with the arithmetic: Closing balance = Opening balance + Net cash flow. Net cash flow = Total inflows - Total outflows.

Costs and break-even analysis

Understanding costs is fundamental. Every calculation in the finance section builds on these definitions.

Types of cost

Fixed costs - costs that do not change with the level of output. Rent, insurance premiums and salaried staff cost the same whether you produce 100 units or 10,000.
Variable costs - costs that change directly with output. Raw materials, packaging and delivery costs increase as you produce more.
Total costs = Fixed costs + Variable costs
Revenue = Selling price per unit x Number of units sold
Profit = Revenue - Total costs

Break-even analysis

The break-even point is the level of output at which total revenue equals total costs. Below this point, the business makes a loss. Above it, the business makes a profit.

Break-even output = Fixed costs / (Selling price per unit - Variable cost per unit)

The denominator (selling price minus variable cost) is called the contribution per unit. It represents how much each unit sold contributes towards covering fixed costs.

Worked example: A business has fixed costs of 20,000 GBP. Each unit sells for 10 GBP and has a variable cost of 6 GBP. Break-even = 20,000 / (10 - 6) = 20,000 / 4 = 5,000 units. The business must sell 5,000 units just to cover all its costs.

Common mistake: Students sometimes subtract fixed costs from total revenue to find break-even, which is wrong. The formula uses contribution per unit as the denominator, not total revenue or total variable costs. Learn the formula, practise it, and always show your working in the exam.

Break-even charts display costs, revenue and output on a graph. You should be able to read one and identify the break-even point (where the total cost and total revenue lines cross), the margin of safety (the gap between actual output and break-even output), and the areas of profit and loss. The igcse 4bs1 business finance questions on break-even regularly ask how changes in price or costs shift the break-even point.

Financial documents

Statement of comprehensive income (income statement)

This document shows whether a business made a profit or a loss over a period. Its main components:

Sales (revenue) - the total income from selling goods or services
Cost of sales - the direct costs of producing the goods sold (raw materials, direct labour)
Gross profit = Sales - Cost of sales
Expenses (overheads) - indirect costs such as rent, utilities, marketing, salaries of non-production staff
Operating profit = Gross profit - Expenses

If gross profit is healthy but operating profit is low, the problem lies with expenses, not with the core business activity. That distinction matters because the response is different: cutting production costs is a different strategy from cutting overheads.

Statement of financial position (balance sheet)

This is a snapshot of what the business owns and owes at a specific point in time:

Non-current assets - long-term items the business owns (property, machinery, vehicles)
Current assets - short-term items that can be converted to cash within a year (stock, trade receivables, cash)
Current liabilities - debts due within a year (overdraft, trade payables)
Non-current liabilities - debts due after more than a year (bank loans, mortgages)
Capital employed - the total funding invested in the business (total assets minus current liabilities, or equity plus non-current liabilities)

Accounts analysis

Numbers on their own do not tell you much. A gross profit of 200,000 GBP sounds impressive, but if the business generated 2 million GBP in sales to earn it, the margin is only 10%. Ratios put figures into context and allow meaningful comparisons between years or between different businesses.

Key ratios

Ratio	Formula	What it tells you
Gross profit margin	(Gross profit / Revenue) x 100	How much of each pound of revenue remains after cost of sales. Higher is better.
Operating profit margin	(Operating profit / Revenue) x 100	How much of each pound of revenue remains after all operating expenses. Higher is better.
Markup	(Gross profit / Cost of sales) x 100	How much has been added to the cost of sales to set the selling price.
Return on capital employed (ROCE)	(Operating profit / Capital employed) x 100	How efficiently the business uses its capital to generate profit. A key indicator for investors.
Current ratio	Current assets / Current liabilities	Can the business pay its short-term debts? A ratio between 1.5 and 2.0 is generally healthy.
Acid test ratio	(Current assets - Stock) / Current liabilities	Same as current ratio but excludes stock, which may not be easy to sell quickly. Above 1.0 is generally safe.

The edexcel igcse business explained approach to ratios is always: calculate, state the result, and then interpret what it means for the business. A current ratio of 0.8 is not just a number; it means the business cannot cover its short-term debts from its current assets, which is a warning sign of potential insolvency.

Self-check questions

State two internal and two external sources of finance, and explain when each would be appropriate.
A business has an opening balance of 3,000 GBP, total inflows of 12,000 GBP and total outflows of 14,500 GBP. Calculate the closing balance and explain what this means.
Fixed costs are 30,000 GBP. Selling price per unit is 15 GBP. Variable cost per unit is 9 GBP. Calculate the break-even level of output.
Explain the difference between gross profit and operating profit.
A business has current assets of 50,000 GBP (including stock of 20,000 GBP) and current liabilities of 40,000 GBP. Calculate the current ratio and the acid test ratio. Comment on the liquidity position.
Explain why a business might choose crowdfunding over a bank loan to finance a new product.

These edexcel igcse business notes on finance are the foundation for the calculation-heavy questions on both papers. The edexcel igcse business practice questions above mirror the style the exam uses, so working through them under timed conditions is the best way to build confidence. If the ratios or the break-even formula still feel slippery, practise them until the arithmetic is automatic, because on exam day you want to spend your mental energy on interpretation, not on trying to remember which number goes where.