Question 1

What is the difference between cash flow and profit?

Accepted Answer

Cash flow is the actual movement of money into and out of a business over a period, while profit is the surplus of revenue over costs. A business can be profitable but have negative cash flow if it sells on credit (customers pay later) or buys inventory upfront. For example, a bakery might sell £10,000 of cakes in a month (profit) but only receive £5,000 cash because customers pay later – it still needs cash to buy ingredients. Profit is shown on the profit and loss account; cash flow is tracked via a cash flow forecast.

Question 2

What are the main sources of finance for a business?

Accepted Answer

Sources of finance are categorised as internal (from within the business) or external (from outside). Internal sources include retained profit (profits kept in the business), sale of assets (e.g., selling unused equipment), and owner's capital (money invested by the owner). External sources include bank loans (long-term, with interest), overdrafts (short-term borrowing), trade credit (buy now, pay later), share capital (for limited companies, selling shares), and government grants. The choice depends on the amount needed, the purpose (short-term vs. long-term), and the business's financial situation.

Question 3

How do you calculate break-even point?

Accepted Answer

The break-even point is where total revenue equals total costs, so the business makes neither a profit nor a loss. The formula is: Break-even point (in units) = Fixed Costs ÷ (Selling Price per unit – Variable Cost per unit). For example, if fixed costs are £10,000, selling price is £50, and variable cost per unit is £30, then contribution per unit is £20, and break-even is 10,000 ÷ 20 = 500 units. You can also calculate break-even in revenue by multiplying units by selling price. A break-even chart shows this visually.

Question 4

Why is the finance function important for a business?

Accepted Answer

The finance function is vital because it ensures the business has enough money to operate, grow, and meet its obligations. It helps with planning (budgets, cash flow forecasts), controlling costs, making investment decisions (e.g., buying new machinery), and measuring performance (profitability, liquidity). Without effective financial management, a business could run out of cash, miss growth opportunities, or fail to pay suppliers and employees. It also provides information to stakeholders like investors, banks, and HMRC.

Question 5

What is the difference between a profit and loss account and a balance sheet?

Accepted Answer

A profit and loss account (income statement) shows a business's revenue, costs, and profit or loss over a period (e.g., a year). It answers: 'How much profit did the business make?' A balance sheet shows the business's assets (what it owns), liabilities (what it owes), and equity (owner's funds) at a specific point in time. It answers: 'What is the business worth?' The profit from the profit and loss account is added to retained earnings on the balance sheet. Both are key financial statements for assessing performance.

Question 6

How can a business improve its cash flow?

Accepted Answer

A business can improve cash flow by increasing cash inflows or reducing cash outflows. Strategies include: offering discounts for early payment from customers (to speed up receipts), negotiating longer payment terms with suppliers (to delay outflows), reducing inventory levels (to free up cash), increasing sales (through marketing or promotions), selling unused assets, or arranging an overdraft facility. It's also important to prepare a cash flow forecast to predict shortfalls and take action early. Improving cash flow is crucial for survival, especially for small businesses.

The role of the finance function

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Key Concepts

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Related Topics in OCR GCSE Business

Break-even

Business activity

Business aims and objectives

Business growth