The Need for Finance (AQA GCSE Business)
Revision Note
Written by: Lisa Eades
Reviewed by: Steve Vorster
Why Businesses Need Finance
All businesses need finance to get started, allow them to grow and fund their continuing activity
Diagram: why business finance is needed
Business finance is needed to meet short-term and long-term needs and can be used to set up or grow a business
Short-term finance needs
Finance is needed by business to meet short-term and long-term liabilities and to fund day-to-day activities
Short-term sources of finance are needed to meet regular costs such as paying for utilities, suppliers and employee wages
They are likely to be relatively small amounts and are rarely needed beyond a year
Where revenue from sales does not cover these expenses, sources such as overdrafts or trade credit may be useful
Long-term finance needs
Longer-term sources of finance are needed to fund the purchase of non-current assets such as buildings and other types of capital resources or to acquire other businesses
These are likely to be large sums that may be required for a significant period of time
Where retained profit is not sufficient to meet these needs, businesses may consider taking out long-term loans, mortgages or raising share capital
Start-up finance
Start-up finance is needed by a new business to pay for non-current assets and current assets, such as stock, before it can begin trading
The amount of start-up finance a business needs is identified in the business plan
Owners often invest their own capital into a new business
Some small new business owners obtain a start-up loan to cover initial costs
Financing business expansion
As a business grows, more finance may be needed to purchase capital equipment
It may require more machinery, buildings, IT infrastructure or vehicles which help the business increase output
If a business wants to grow by developing new products, large amounts may need to be invested in research and development (R&D)
E.g. Apple's annual research and development expenses for 2023 were $29.915 Billion, a 13.96% increase from 2022, to invest heavily in Artificial Intelligence (AI) and product innovation
Examiner Tips and Tricks
When recommending suitable sources of finance, consider the business context carefully. Newly-established businesses may find it difficult to raise finance, especially if they are operating in risky markets, so they may have fewer options than established businesses.
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