9609 · 5.1.1
The need for business finance flashcards
Revision flashcards for Cambridge 9609 The need for business finance (syllabus 5.1.1). Flip, recall, then mark a real past-paper question.
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Why need finance?
To acquire assets, fund operations, grow, and survive cash gaps.
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Capital expenditure?
Long-term asset spending — machinery, buildings (fixed assets).
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Revenue expenditure?
Day-to-day costs — wages, materials, rent (expenses).
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Start-up finance needs?
Premises, equipment, marketing, initial inventory, working capital buffer.
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Growth finance needs?
New factories, entering markets, R&D, larger workforce.
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Replacement finance?
Upgrade technology before competitors; maintain efficiency.
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Link to 5.2?
Once need identified, choose source — internal vs external (5.2.2).
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Link to objectives?
Profit maximisation may limit investment; growth objectives need more finance.
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What is the primary purpose of business finance?
To provide the funds necessary for a business to start, operate, and expand. This includes purchasing assets, covering daily costs (working capital), and investing in growth opportunities.
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Define Capital Expenditure (Capex).
Spending on non-current (fixed) assets that will be used by the business for more than one year, such as machinery, property, or vehicles. It is an investment in the future earning capacity of the business.
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Define Revenue Expenditure.
Spending on the day-to-day running costs of a business, such as wages, rent, utility bills, and raw materials. These costs are consumed within one accounting period.
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How do the financial needs of a 'start-up' business differ from a 'mature' business?
A start-up needs significant finance for capital expenditure and to cover initial losses (often from high-risk sources). A mature business often generates its own finance (retained profits) for replacement investment and innovation.
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Why is it incorrect to record the purchase of a new delivery van as a revenue expense?
A van is a non-current asset with a useful life of over a year. Recording it as a revenue expense would incorrectly reduce the current year's profit significantly and understate the value of the business's assets on the Statement of Financial Position.
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What is working capital?
The finance needed for the day-to-day running of a business, calculated as current assets minus current liabilities. It covers the time lag between paying for costs and receiving revenue from sales.
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Give an example of a financial need for a business in the 'maturity' stage.
Funding for Research and Development (R&D) to innovate and stay ahead of competitors, or financing the replacement of old machinery with more efficient technology.
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Why is the distinction between capital and revenue expenditure important for tax purposes?
Revenue expenditure can be fully deducted from revenue in the year it is incurred, reducing taxable profit. Capital expenditure is not fully deductible in one year; instead, a portion is deducted annually as depreciation (capital allowance).