The Need for Business Finance (Cambridge International IGCSE Business)

Start-up capital

• All businesses need finance to get started, allow them to grow, to fund capital investments and their continuing activity

Diagram showing reasons why businesses need finance: starting up, buying equipment, growth, and covering day-to-day expenses.

• Start-up capital is the finance needed by a new business to pay for fixed assets and current assets before it can begin trading
• A business usually estimates the amount of start-up capital they need in the business plan
• Many small new businesses will get a start-up loan to cover these initial costs

Case Study Lily’s Local – Starting Up a Retail Clothing Shop

Lily plans to open a small clothing shop called Lily’s Local in a busy town centre. She will sell affordable fashion aimed at teenagers and young adults.

• Before she can open her doors to customers, Lily lists her start-up costs

Start-up costs for Lily’s Local

Type of cost	Explanation
Premises	- Lily will need to pay a deposit and rent in advance for the shop unit
Shop fittings	- She must install shelves, rails, mirrors, a counter and changing rooms
Stock	- Initial clothing items must be bought in bulk from suppliers
Insurance	- Cover for **theft, fire, public liability and damage to stock or property
Marketing and signage	- Lily will pay for shop signs, flyers, social media adverts and a basic website
Technology	- A point-of-sale (POS) system, card reader and, possibly, a small computer
Staff costs	- If hiring part-time help, she will need to** pay wages and cover training
Utilities connection	- Setting up electricity, water, internet and phone lines
Legal and professional fees	- One-time payments for legal advice, setting up a business bank account or using an accountant

• Lily’s start-up costs include both one-off payments (like fittings and licences) and pre-payments (like rent and stock)

  • Planning these carefully is vital to avoid running out of cash before the shop opens

• Once she begins trading, ongoing costs like rent, wages and restocking will become part of her regular operating expenses

Capital for growth

• As a business grows more finance may be needed for capital expenditure

  • It may require more equipment, buildings, IT equipment or vehicles, which will allow the business to increase output

• If a business wants to grow by developing a new product, it will need to spend large amounts of capital on research and development (R&D)

  • For example. Apple's annual research and development expenses for 2023 were $29.915 billion

    • This represented a 13.96% increase from 2022, with investments in artificial intelligence (AI) and innovation of new products

Finance to replace fixed assets and invest in new technology

• Businesses need finance not just to buy new things, but also to keep their operations up-to-date

• Fixed assets like machinery, vehicles, or equipment wear out or become outdated over time

  • If they are not replaced

    • Production may slow down
    • Maintenance costs may increase
    • Products may become lower quality

  • Replacing old assets helps the business stay efficient and avoid delays

  • However, fixed assets are expensive, so businesses often need loans or use leasing to afford them.

• Technology changes quickly, so businesses need to invest regularly in

  • Modern software (e.g. for accounts or sales)
  • Improved machines (e.g. faster or more accurate equipment)
  • Digital tools (e.g. online payment systems or apps)

Working capital

Spec point — definition and calculation of working capital

• Working capital is the money used in the day-to-day operations of a business

  • Finance is required for working capital, which is spending on raw materials, wages or utilities

• Having a steady flow of working capital is essential to keep the business operational

  • Without working capital, the business would be unable to cover its day-to-day expenses
  • It may suffer cash-flow problems* which could lead to business failure

Exam Hint Be specific when explaining why finance is needed – link it to clear purposes such as start-up capital, working capital, or expansion, rather than just saying “to run the business”

Short-term and long-term finance needs

• Short-term finance needs last less than one year

  • Examples include

    • Paying for stock or raw materials
    • Paying wages and utility bills
    • Covering temporary cash flow problems
    • Paying suppliers or rent
    • Unexpected repairs or inexpensive items of equipment

• Long-term finance needs last for more than one year

  • Examples include

    • Buying buildings, machinery or vehicles
    • Starting a new business
    • Expanding into new markets or countries
    • Developing new products
    • Replacing outdated equipment or technology