IGCSE Business Studies Unit 5 Review PDF

Of course! Here’s a full Unit 5 Review for IGCSE Business Studies (Cambridge) covering everything you need to know. Unit 5: Financial Information and Financial Decisions 5.1 The Need for Business Finance Why Businesses Need Finance Start-up capital – Money needed to start a busines...

Of course! Here’s a full Unit 5 Review for IGCSE Business Studies (Cambridge) covering everything you need to know. Unit 5: Financial Information and Financial Decisions 5.1 The Need for Business Finance Why Businesses Need Finance Start-up capital – Money needed to start a business. Working capital – Day-to-day operating expenses. Expansion – Growth, new equipment, entering new markets. Research and development (R&D) – Innovation and new product development. To cover unforeseen events – Emergencies, economic downturns. 5.2 Sources of Finance Internal Sources (From Within the Business) 1. Retained profit – Profit reinvested in the business instead of distributed to owners. No repayment or interest. May not be sufficient. 2. Sale of assets – Selling old equipment, vehicles, or land. Quick cash injection. Not always possible. 3. Owners’ capital (for sole traders & partnerships) – Owners invest their own money. No interest or repayment. Risky for owners. External Sources (From Outside the Business) 1. Short-term sources (Less than 1 year) Overdraft – Bank allows the business to withdraw more money than in the account.  Flexible. High interest. Trade credit – Suppliers allow delayed payment. Helps cash flow. Possible supplier penalties. Debt factoring – Selling invoices (money owed by customers) to a factoring company. Immediate cash. Loss of some revenue. 2. Long-term sources (More than 1 year) Bank loans – Borrowing from a bank, repaid with interest. Fixed repayments. Interest cost. Leasing – Renting assets instead of buying. No large upfront cost. More expensive in the long run. Hire purchase – Buying an asset with installment payments. Spreads cost. Asset isn’t owned until fully paid. Selling shares (Equity finance) – Raising money by selling shares in the company. No repayment required. Loss of control if too many shares are sold. Government grants – Free money from the government, usually with conditions. No repayment.  Often hard to qualify. 5.3 Cash Flow Forecasting and Working Capital Cash Flow Definition: The movement of money in and out of a business. Cash inflows – Money coming in (e.g., sales revenue, loans, investment). Cash outflows – Money going out (e.g., wages, rent, raw materials). Cash Flow Forecast A table predicting future cash inflows and outflows. Why it’s important: Prevents cash shortages. Helps secure finance. Plans for future expenses. Causes of Cash Flow Problems Poor sales. Customers taking too long to pay (late payments). Over-investment in stock. High fixed costs (e.g., rent, wages). Solutions to Cash Flow Problems Increase cash inflows: Encourage early customer payments. Increase sales. Secure short-term loans. Reduce cash outflows: Cut unnecessary expenses. Delay payments to suppliers (if possible). 5.4 Income Statements What is an Income Statement? A financial document showing a business’s profit or loss over a period. Key Terms in an Income Statement: 1. Revenue (Sales Revenue/Turnover) – Total sales income. 2. Cost of Sales – Direct costs of producing goods sold. 3. Gross Profit = Revenue - Cost of Sales 4. Expenses (Overheads) – Indirect costs like rent, wages, and advertising. 5. Net Profit = Gross Profit - Expenses Why Income Statements Matter Shows if a business is profitable. Helps investors and banks assess business performance. Identifies cost-cutting opportunities. 5.5 Statement of Financial Position (Balance Sheet) What is a Balance Sheet? A financial statement showing a business’s financial position at a specific date. Key Components of a Balance Sheet: 1. Assets (What the business owns) Fixed (Non-current) Assets – Long-term assets (e.g., land, buildings, machines). Current Assets – Short-term assets (e.g., cash, stock, accounts receivable). 2. Liabilities (What the business owes) Current Liabilities – Short-term debts (e.g., overdrafts, accounts payable). Non-current Liabilities – Long-term debts (e.g., loans, mortgages). 3. Capital/Equity Share Capital – Money invested by shareholders. Retained Profit – Profits reinvested into the business. Why a Balance Sheet Matters Shows financial health. Helps assess liquidity (ability to pay debts). Helps banks/investors decide on lending. 5.6 Analysis of Accounts Financial Ratios Used to assess business performance. Profitability Ratios 1. Gross Profit Margin = (Gross Profit ÷ Revenue) × 100 Shows how much of revenue is left after paying production costs. 2. Net Profit Margin = (Net Profit ÷ Revenue) × 100 Shows overall profitability after all expenses. Liquidity Ratios 1. Current Ratio = Current Assets ÷ Current Liabilities Measures short-term financial stability. Ideal ratio: 1.5 – 2.0 (below 1 means liquidity problems). 2. Acid-Test Ratio = (Current Assets - Inventory) ÷ Current Liabilities Excludes stock to assess immediate liquidity. Ideal ratio: Above 1 (below 1 suggests liquidity risk). Why Ratio Analysis is Useful Helps businesses compare performance over time. Helps investors decide on investments. Identifies financial strengths and weaknesses. Final Tips for Unit 5: Understand the difference between internal and external finance. Be able to interpret cash flow forecasts and balance sheets.  Know how to calculate and interpret financial ratios. Be ready to apply knowledge to case studies in exams.