Why Businesses Need Finance (Years 7–11) — Business Studies

Businesses need money to start up and to keep running; managing cash carefully keeps a firm alive.

Finance simply means the money a business needs. Every business, from a market stall to a large bakery, needs finance at two moments: when it starts, and every day it keeps trading.

Why this matters A business can be full of good ideas and still fail if it runs out of money. Understanding what money is needed, and when, is the first step to keeping a firm healthy.

Start-up costs vs running costs

Start-up costs are the one-off costs of getting ready to trade for the first time. Running costs (also called operating costs) are the regular costs of trading day to day.

Start-up costs: equipment, an oven, a delivery van, shop fittings, first stock, a website.
Running costs: wages, rent, electricity, more stock, packaging, phone bills.

Capital vs revenue expenditure

These two terms describe what the money is spent on.

Capital expenditure is money spent on non-current (fixed) assets that last a long time, such as machinery, vehicles or buildings.
Revenue expenditure is money spent on the day-to-day running of the business, such as raw materials, wages and rent, which are used up quickly.

For example, when Aisha buys an oven for her bakery that is capital expenditure; when she buys flour every week that is revenue expenditure.

Why cash matters most

Cash is the money a business can use straight away to pay its bills. A business can be making a profit on paper yet still fail if it does not have cash in the bank when a payment is due. This is called being insolvent.

A firm needs enough cash to pay wages, suppliers and rent on time — running short even for a short period can stop the business trading.

A business can be profitable on paper the whole time while its cash still dips dangerously low — profit and cash are not the same thing.

When is finance needed?

To start the business (setting up).
To grow or expand (a second shop, more machines).
To pay day-to-day bills when cash is short.
To survive a difficult period, such as a quiet season.

Matching the right source of finance to the right need is a key skill we build on in later chapters.

Put these steps in order for a new business working out how much start-up finance it needs:

List all the one-off start-up costs (equipment, fittings, first stock)
Estimate the regular running costs for the first few months
Add a cash buffer for a slow or unexpected period
Total these figures to find the finance needed before launch

Common exam mistake: treating "unprofitable" and "insolvent" as the same thing. A business can be profitable on paper — revenue exceeds costs over the period — and still become insolvent if it runs out of cash to pay a bill on time, for example because customers are paying late.

Exam technique: to tell capital and revenue expenditure apart, ask "does it last more than a year as a fixed asset?" — if yes, it's capital expenditure (an oven, a van); if it's used up in day-to-day trading (flour, wages), it's revenue expenditure.