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GCSE Business 03 — Business Finance

Public

Business finance: sources of finance, revenue, costs, profit and loss, break-even, cash flow, and financial statements.

Business EN
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Internal Sources of Finance

Funds generated from within the business itself, such as retained profits or selling assets, which avoid interest and loss of control.

Key points

  • Retained Profit: The cheapest source of finance; profit kept in the business after tax and dividends.
  • Sale of Assets: Selling unwanted items (machinery, land) to raise cash quickly without debt.
  • Working Capital Management: Reducing stock levels (de-stocking) or chasing debtors to free up cash.
  • Internal finance does not require repayment or interest, lowering risk.
  • However, it is limited by what the business owns or earns; new start-ups rarely have retained profit.

Worked example

Question

A sole trader wants to buy a new van for £15,000. She has £20,000 in retained profit. Explain one advantage of using retained profit for this purchase.

Solution

Advantage: No interest to pay.

Explanation: By using her own funds, she avoids taking out a bank loan which would require monthly interest payments. This keeps her fixed costs lower in the future and reduces the risk of the business failing.

Common pitfalls

  • Thinking retained profit is 'free money'—it has an opportunity cost (it could have been paid to owners).
  • Assuming start-ups can use retained profit (they usually have none yet).
  • Confusing 'Selling Assets' with selling stock (Selling stock is normal trading; selling assets means selling the machinery/vans used to trade).

Prerequisites

  • Basic business ownership (Sole Trader vs Ltd)
  • The concept of profit
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