11 mark
Which of the following is an internal source of finance?
Government grants
Loan
Overdraft
Retained profit
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Sources of Finance (AQA GCSE Business)
Topic Questions
51 mins17 questions
21 mark
State one short term reason why businesses need finance.
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31 mark
Which source of finance is available to a limited company but not a sole trader?
Bank loan
Mortgage
Overdraft
Share issue
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41 mark
Which source of finance would be appropriate for a business wanting to avoid interest payments?
A Bank loan
Mortgage
Retained profit
Overdraft
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51 mark
State one reason why a business may need start-up finance.
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61 mark
Which of the following is a description of trade credit?
A flexible arrangement with a bank to allow a business to spend more than it has in its account
An agreement with a supplier to receive goods now and pay for them at a later date
The acquisition of equipment, such as machinery or vehicles, spreading the cost of its use over time
A sum of money borrowed and repaid with interest over a determined period of time
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71 mark
Which of the following is true in relation to government grants?
They do not usually have to be repaid
Collateral is required for a grant to be approved
Interest is applied to grant repayments
They are only available to public sector organisations
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12 marks
Explain one disadvantage of using an overdraft as a source of finance.
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24 marks
Case Study
Ellie Swift is the owner of Swiftly Services. She always dreamed of running her own business as she wanted to be her own boss and make her own decisions. Swiftly Services offers a wide range of home services, from unblocking sinks to painting and decorating.
Ellie’s parents agreed to lend her the money she needed to start up her business interest free. They had an informal agreement that she would pay them back what she could afford each month.
Table 2 Cash Flow Forecast for Swiftly Services
February | March | April | May | |
£ | £ | £ | £ | |
Cash inflows | 2 000 | 2 300 | 2 800 | 3 300 |
Cash outflows | 20 300 | 800 | 1 100 | 1 450 |
Opening balance | 15 000 | (3 300) | (1 800) | (100) |
Closing balance | (3 300) | (1 800) | (100) |
After running Swiftly Services from February to May, Ellie was pleased to see that her cash flow forecast had been accurate. However, Ellie’s parents have unexpectedly asked her to repay £1000 a month, starting in June, as they are moving to a new house and need the money quickly. Ellie’s parents are now concerned about how soon they will get their money back. They have told Ellie that she should expand her portfolio of services and provide gardening services over the summer months. Gardening services would include mowing lawns, planting and weeding. They have forecast that this could bring in an extra £1000 cash inflow per month. However, to start offering these services, Ellie would need to spend £2000 on gardening equipment. This would increase her cash outflows. She would also need to hire someone to help her do the extra work.
Using the case study, explain one disadvantage to Ellie of using money borrowed from her parents to set up Swiftly Services.
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32 marks
Explain one benefit of using personal savings to fund a business start-up.
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42 marks
Explain one disadvantage of using trade credit as a source of finance.
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54 marks
State and explain two factors that affect a business's choice of finance.
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64 marks
Case Study
Swim to Success (STS) is a programme that teaches young children how to swim through weekly lessons. It was developed by Jade Jackson, an ex-Olympic swimmer. Jade employs swimming instructors who deliver the programme using the pool facilities at gyms across the North East of England.
Information:
Number of pools with swimming classes | 5 |
Price per class per child | £9 |
Number of swimming classes per pool per week 1 | 14 |
Maximum number of children per swimming class | 8 |
Jade set STS up as a sole trader because she wanted to make the key business decisions herself. Initially Jade used a bank loan as her main source of finance and secured the loan against her home, which she owns. Jade would like to expand STS. However, she is struggling to raise the finance herself as her costs are still high. To help her manage finances, Jade has arranged an overdraft on her business bank account. She relies on this to pay employees if the business does not have enough cash at the end of the month. Jade has recently received a letter from the bank explaining that interest rates on bank loans and overdrafts are going to increase.
Explain one disadvantage to Jade of using an overdraft to fund STS's day-to-day expenses.
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72 marks
Explain one advantage of using venture capital to finance business growth.
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19 marks
Case Study
Sonya has been running Bambino Parties for two years. Last year, she made a profit of £8,000 and now wants to increase the number of parties by 20%.
A friend recently started to work for Sonya on a part time basis. She designs backgrounds for parties and these have proved very popular. Her friend has asked if she can become a partner in Bambino Parties. She is willing to invest £3,000 into the business in return for 50% of the profits and will work full time to help expand the business.
When Sonya takes a booking for a party, she asks for a 10% deposit and then receives the rest of the agreed price after the party. Her suppliers, people who provide venues, catering, and birthday cakes, expect to be paid in advance. She is worried about the effect this will have on cash flow.
Sonya has produced a cash flow forecast:
June | July | August | September | |
Total Income | 5,000 | 11,100 | 9,200 | 11,600 |
Total Expenses | 8,100 | 7,100 | 9,800 | 7,900 |
Balance brought forward | (1,300) | (4,400) | (400) | (1,000) |
Balance carried forward | (4,400) | (400) | (1,000) | 2,700 |
Sonya wants to have a website designed to promote her business, this will cost £4,800. She is considering the following two options to pay for the website:
A bank loan for £4,800 to be repaid over 2 years
Take her friend on as a partner.
Recommend which is the better option for Sonya to take. Give reasons for your advice.
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29 marks
Case Study
Skate4U Ltd manufactures and sells skateboards. The skateboards are handmade using high-quality materials. The average selling price of a Skate4U Ltd skateboard is £285. This is a high price compared to other brands that sell mass-produced skateboards.
Skate4U Ltd has decided to sponsor a team in the national skateboarding competition. This will cost a minimum of £50,000. According to the contract agreed, if the team reaches the final stages of the competition, the cost of sponsorship will increase. Skate4U Ltd is considering whether to pay for the sponsorship using retained profit or an overdraft. Skate4U Ltd aims to pay off the additional cost within six months.
Interest rates on overdrafts have increased to 12% per year. Skate4U Ltd has a maximum overdraft of £65,000 available. It has already used £10,000 of this available overdraft. Skate4U Ltd made £122,000 net profit in 2020, which it planned to retain for new product development.
Table 2 Selected financial information for Skate4U Ltd
2020 | 2019 | |
(£000s) | (£000s) | |
Sales revenue | 610 | 850 |
Cost of goods sold | 275 | 350 |
Total expenses | 213 | 262 |
Non-current assets | 255 | 268 |
To pay for the sponsorship of a national skateboarding competition, Skate4U Ltd is considering using £50,000 of its available overdraft at the current 12% annual interest rate.
Recommend whether Skate4U Ltd should use its overdraft to fund the sponsorship.
Give reasons for your recommendation.
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36 marks
Case Study
Swim to Success (STS) is a programme that teaches young children how to swim through weekly lessons. It was developed by Jade Jackson, an ex-Olympic swimmer. Jade employs swimming instructors who deliver the programme using the pool facilities at gyms across the North East of England.
Information:
Number of pools with swimming classes | 5 |
Price per class per child | £9 |
Number of swimming classes per pool per week 1 | 14 |
Maximum number of children per swimming class | 8 |
Jade set STS up as a sole trader because she wanted to make the key business decisions herself. Initially Jade used a bank loan as her main source of finance and secured the loan against her home, which she owns. Jade would like to expand STS. However, she is struggling to raise the finance herself as her costs are still high. To help her manage finances, Jade has arranged an overdraft on her business bank account. She relies on this to pay employees if the business does not have enough cash at the end of the month. Jade has recently received a letter from the bank explaining that interest rates on bank loans and overdrafts are going to increase.
Analyse one reason why Jade chose to use external sources of finance to set up and grow Swim to Success.
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