5.1 Business Finance

AS Level Business | Cambridge 9609

2026 📋 Syllabus Objectives

By the end of these notes, you should be able to explain and apply:

  1. The reasons why businesses need finance to start up, to grow, and to survive
  2. The distinction between short-term and long-term needs for finance
  3. The difference between cash and profits
  4. Business failure as a consequence of lack of finance — bankruptcy, liquidation, and administration
  5. The meaning and importance of working capital
  6. Managing trade receivables and trade payables
  7. The distinction between capital expenditure and revenue expenditure

📖 Main Content

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Objective 1 — Why Do Businesses Need Finance?

Finance simply means money. Every business — whether it has just started or has been running for years — needs money at different points in its life. Without finance, a business cannot operate.

There are three main reasons why businesses need finance:

💡 1. Finance to Start Up

When a brand-new business is being created, it needs money before it can even open its doors. This is called start-up finance.

Think about opening a small bakery. Before selling a single loaf of bread, you need to:

  • Rent or buy a shop or kitchen
  • Buy ovens, mixers, and equipment
  • Purchase your first batch of flour, butter, and other ingredients
  • Create a sign, a logo, and advertise to customers
  • Pay staff wages until sales start coming in

All of these costs must be paid before the business earns any money. This is why start-up finance is so important.

Usually, the owner puts in their own savings (this is called owner's capital), or they take out a start-up loan from a bank. The amount of money needed is usually planned out in the business plan — a document that shows how the business will work and how much it will cost.

💡 2. Finance to Grow

Once a business is up and running, it may want to expand — that is, get bigger and do more. This is called growth finance.

For example, a small clothing brand that sells online may want to:

  • Open physical stores in new cities
  • Buy new, faster machinery to make more clothes
  • Hire more workers
  • Invest in research and development (R&D) — spending money on creating new products or improving existing ones

📌 Real-World Example: Apple's annual spending on R&D in 2023 was nearly $30 billion — money invested in developing new technology and artificial intelligence. Without this finance, they could not grow and innovate.

Growth requires large amounts of money, often more than a business earns from day-to-day sales. So businesses must find additional sources of finance to fund expansion.

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