What is the difference between internal and external sources of finance?

Internal sources come from within the business, such as retained profit (profit kept in the business) or selling assets. External sources come from outside, like bank loans, share capital, or trade credit. Internal sources are cheaper (no interest) but limited, while external sources provide more funds but often cost more.

How do you calculate profit in GCSE Business?

Profit is calculated as Total Revenue minus Total Costs. Total Revenue is selling price times quantity sold. Total Costs are fixed costs plus variable costs. For example, if a business sells 100 items at £10 each, revenue is £1,000. If fixed costs are £300 and variable costs are £5 per item (£500 total), profit is £1,000 – £800 = £200.

What is the difference between fixed and variable costs?

Fixed costs do not change with the level of output, like rent, insurance, and salaries. Variable costs change directly with output, such as raw materials and packaging. For example, a bakery's rent is fixed, but the cost of flour increases as more bread is baked.

Why is cash flow important for a business?

Cash flow is the movement of money in and out of a business. It is crucial because a business needs cash to pay bills, wages, and suppliers. Even a profitable business can fail if it runs out of cash (insolvency). Managing cash flow ensures the business can operate day-to-day and avoid bankruptcy.

What is an income statement?

An income statement (or profit and loss account) shows a business's revenue, costs, and profit over a period, usually a year. It starts with revenue, subtracts cost of goods sold to get gross profit, then deducts expenses like rent and wages to find net profit. It helps stakeholders see if the business is making money.

How do you choose the best source of finance?

Consider the amount needed, the time period (short or long term), the cost (interest or dividends), and the business's situation. For example, a start-up might use a bank loan for equipment (long-term), while a cash flow problem might be solved with an overdraft (short-term). Always justify your choice with reasons.

Finance

WJEC

GCSE

Business operations focuses on the efficient management of key functions and resources to maximize profit. It covers production methods, quality management, supply chain logistics, and the sales process, emphasizing how these operations must integrate with other business functions to achieve organizational aims.

Objectives

Exam Tips

Pitfalls

Key Terms

Mark Points

Topic Overview

Finance is a core topic in WJEC GCSE Business, focusing on how businesses manage their money to survive, grow, and succeed. It covers the sources of finance available to businesses, the costs and revenues they face, and the key financial statements used to measure performance. Understanding finance is crucial because without effective financial management, even the best business ideas can fail. This topic connects to other areas like marketing and operations, as financial decisions influence pricing, investment, and production.

Students will learn to distinguish between internal and external sources of finance, such as retained profit, bank loans, and share capital. They will also explore the difference between fixed and variable costs, and how to calculate profit using the formula: Total Revenue – Total Costs. Additionally, the topic introduces the main financial statements: the Income Statement (profit and loss account) and the Statement of Financial Position (balance sheet). These statements help stakeholders assess a business's profitability and financial health.

Mastering finance is essential for any business student because it provides the tools to evaluate business performance and make informed decisions. In exams, you will be expected to calculate profit margins, interpret financial data, and recommend appropriate sources of finance for given scenarios. This topic also lays the groundwork for A-level Business or Economics, making it a vital part of your GCSE studies.

Key Concepts

Core ideas you must understand for this topic

→Sources of finance: internal (retained profit, sale of assets) and external (bank loans, overdrafts, share capital, trade credit). Each has advantages and disadvantages depending on the business's needs.
→Costs: fixed costs (e.g., rent, salaries) do not change with output; variable costs (e.g., raw materials) change directly with output. Total costs = fixed costs + variable costs.
→Revenue: the income from selling goods or services, calculated as selling price × quantity sold. Profit = total revenue – total costs.
→Income Statement: shows a business's profit or loss over a period. Key terms: gross profit (revenue – cost of goods sold) and net profit (gross profit – expenses).
→Statement of Financial Position: a snapshot of assets, liabilities, and equity at a point in time. The accounting equation: Assets = Liabilities + Equity.

What You Need to Demonstrate

Key skills and knowledge for this topic

Understanding of job, batch, and flow production methods
Application of quality control and quality assurance concepts
Knowledge of supply chain stages including procurement, logistics, and stock control
Understanding of the sales process and the importance of customer service
Ability to justify operational decisions based on business context
Recognition of the interdependent nature of business functions

Marking Points

Key points examiners look for in your answers

Understanding of job, batch, and flow production methods
Application of quality control and quality assurance concepts
Knowledge of supply chain stages including procurement, logistics, and stock control
Understanding of the sales process and the importance of customer service
Ability to justify operational decisions based on business context
Recognition of the interdependent nature of business functions

Examiner Tips

Expert advice for maximising your marks

💡Always link operational decisions back to the business's aims and objectives
💡Use specific examples of production methods when justifying a choice
💡Consider the impact of supply chain decisions on costs, quality, and customer satisfaction
💡Ensure you can explain how customer service impacts business reputation and loyalty
💡Always show your workings in calculations. Even if the final answer is wrong, you can earn method marks for correct steps, e.g., using the correct formula for profit.
💡When recommending a source of finance, justify your choice by linking it to the business's situation. For example, 'A start-up should use a bank loan because it needs a large amount for equipment and can repay over time.'
💡Know the difference between gross profit and net profit. In exams, you may be asked to calculate both, so remember to deduct cost of goods sold for gross profit, and then all other expenses for net profit.

Common Mistakes

Pitfalls to avoid in your exam answers

Confusing quality control with quality assurance
Failing to apply operational decisions to specific business contexts
Ignoring the impact of operational decisions on other business functions like finance or marketing
Misunderstanding the difference between job, batch, and flow production
Misconception: Profit is the same as cash. Correction: Profit is a measure of revenue minus costs, but cash flow refers to the actual movement of money in and out. A business can be profitable but still run out of cash if customers delay payment.
Misconception: Bank loans are always the best source of finance. Correction: Loans require interest payments and may not be suitable for short-term needs. For example, an overdraft might be better for temporary cash shortages.
Misconception: Fixed costs never change. Correction: Fixed costs are constant in the short run but can change over time (e.g., rent increases). They are fixed relative to output, not time.

Frequently Asked Questions

Common questions students ask about this topic

Before You Start

Prior knowledge that will help with this topic

•Basic numeracy skills: ability to calculate percentages, add, subtract, multiply, and divide.
•Understanding of business objectives: profit maximisation, survival, growth.
•Basic knowledge of business ownership types (sole trader, partnership, limited company) as they affect sources of finance.

Study Guide Available

Comprehensive revision notes & examples

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Likely Command Words

How questions on this topic are typically asked

Explain

Describe

Justify

Recommend

Calculate

Interpret

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Practice questions tailored to this topic

Finance

Topic Overview

Key Concepts

What You Need to Demonstrate

Marking Points

Examiner Tips

Common Mistakes

Frequently Asked Questions

Before You Start

Study Guide Available

Likely Command Words

Ready to test yourself?

Related Topics in WJEC GCSE Business

Business activity

Business operations

Human resources

Influences on business

How to Revise Finance — WJEC GCSE Business

Examiner Tips for Finance

Common Mistakes in Finance

Key Marking Points

Finance

Topic Overview

Key Concepts

What You Need to Demonstrate

Marking Points

Examiner Tips

Common Mistakes

Frequently Asked Questions

What is the difference between internal and external sources of finance?

How do you calculate profit in GCSE Business?

What is the difference between fixed and variable costs?

Why is cash flow important for a business?

What is an income statement?

How do you choose the best source of finance?

Before You Start

Study Guide Available

Likely Command Words

Ready to test yourself?

Related Topics in WJEC GCSE Business

Business activity

Business operations

Human resources

Influences on business