The Need for Finance (AQA GCSE Business)

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