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9609 · 5.1.1

The need for business finance — practice questions

Practice and worked examples for 9609 The need for business finance. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

Successful café owner plans a second branch. Identify finance needs and classify as capital or revenue expenditure.

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Capital expenditure: Shop fit-out, coffee machines, furniture — long-term assets on balance sheet (10.1.1).

Revenue expenditure: First month's rent, staff wages, coffee beans, utilities — day-to-day running costs.

Working capital need (5.1.2): Cash to cover gap between paying suppliers and receiving customer cash — especially first months when sales building.

Total finance need: CapEx + 3–6 months working capital buffer before branch breaks even (5.4.4).

Worked example 2

Precision Parts Ltd plans to expand its production capacity. The estimated costs are: new machinery $150,000; machinery installation $10,000; factory extension $80,000; additional raw materials for the first 3 months $45,000; additional staff wages for 3 months $30,000; and a marketing launch campaign $5,000. Calculate the total finance needed, distinguishing between capital and revenue expenditure.

Show solution outline

Step 1: Calculate Total Capital Expenditure (Capex) Capex is spending on non-current assets that provide a long-term benefit.

  • New Machinery: 150,000150,000
  • Installation Cost (capitalised as part of the asset's cost): 10,00010,000
  • Factory Extension: 80,00080,000 Total Capex = 150,000+150,000 + 10,000 + 80,000=80,000 = 240,000

Step 2: Calculate Initial Revenue Expenditure / Working Capital Need This is spending on day-to-day operations and launch costs.

  • Additional Raw Materials: 45,00045,000
  • Additional Staff Wages: 30,00030,000
  • Marketing Launch Campaign: 5,0005,000 Total Initial Revenue Expenditure = 45,000+45,000 + 30,000 + 5,000=5,000 = 80,000

Step 3: Calculate Total Finance Needed This is the sum of the capital investment and the initial funds for operations.

  • Total Finance = Total Capex + Total Initial Revenue Expenditure
  • **Total Finance = 240,000+240,000 + 80,000 = 320,000∗∗320,000**

Final Answer: Precision Parts Ltd needs to secure a total of $320,000 for the expansion. This consists of $240,000 for capital expenditure and $80,000 to cover initial operating costs and working capital.

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