The Need for Finance (Edexcel IGCSE Business)

Why do Businesses need Finance?

• Business finance is also known as capital

• It is required for a range of reasons

Diagram: Reasons 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 day to day costs such as paying bills, 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 fixed 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 to 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