Sources of finance and commercial performance

Revise Sources of finance and commercial performance for Commerce 7100 (O Level) — revision notes, 164 practice questions and instant AI marking.

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Cambridge O Level Commerce 7100

Sources of Finance and Commercial Performance

The big idea: A business needs money to start, to run day to day and to grow. Choosing the right source means matching it to the purpose and the time it is needed for. Then a handful of calculations (revenue, gross profit, margin, mark-up, net profit and working capital) show whether the business is performing well and what to change.

Summary — What This Chapter Covers

An entrepreneur organises resources and takes the risk of starting a business.
Short-term finance (under about a year): trade credit, debt factoring, hire purchase, leasing, sale and leaseback, overdraft, selling assets, owner’s savings and retained profit.
Long-term finance: ordinary and preference shares, loans, debentures, venture capital and crowdfunding.
Choose finance by purpose, amount, time period, cost, the type of business and how much control the owners want to keep.
Six calculations: revenue, gross profit, gross profit margin, net profit, working capital and mark-up percentage.
Improve performance by raising revenue (prices, advertising, new products) or cutting costs (cheaper suppliers, lower expenses).

1. Entrepreneurship and Short-term Finance

Syllabus 5.4.1 · Papers 1 & 2

Paying for the day-to-day running

Definition · Entrepreneurship Having an idea for a product or service and organising the resources (money, people, premises) to start and run a business, accepting the risk that it may fail. The person who does this is an entrepreneur.

Short-term finance pays for things that are used up quickly or for gaps in cash flow: buying stock, paying wages before customers pay, a seasonal rush. It is normally repaid or used within a year. (Hire purchase, leasing and sale and leaseback are used for assets but are listed here because each payment is made from day-to-day cash.)

Sources of short-term finance
Source	Advantages	Disadvantages
Trade credit: buying goods now and paying the supplier later (often 30–60 days)	No interest if paid on time; cash stays in the business while the goods are sold	Cash discounts for prompt payment are lost; paying late damages the relationship with suppliers
Debt factoring: selling unpaid customer invoices (trade receivables) to a factoring company for immediate cash	Cash now instead of waiting for customers to pay; the factor collects the debts	The factor keeps a percentage, so the business receives less than the full amount; customers may see it as a sign of cash problems
Hire purchase: paying a deposit and then instalments for an asset; the business owns it after the last payment	Use of the asset at once without paying the full price; cost spread over time	Total cost is higher than the cash price because of interest; the asset can be repossessed if payments are missed
Leasing: renting an asset (vehicle, machinery) for a period; the leasing company owns it	No large outlay; maintenance and upgrades are often included; easy to replace with newer models	The business never owns the asset; over a long period it can cost more than buying
Sale and leaseback: selling an asset (usually premises) and leasing it straight back	Releases a large sum of cash while the business keeps using the asset	The asset is no longer owned; lease payments must be made for years and may rise
Overdraft
Selling assets
Owner’s savings
Retained profit

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Also in the full note

Paying for growth and large assets
Match the finance to the need
The words used in every calculation
Six formulas to learn exactly
Raise revenue, cut costs, protect working capital
Calculations and finance decisions

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