UNIT 2

GCSE BUSINESS –
5.1 – The Role of the Finance Function
Aims and Objectives
Specification Points – 5.1 The role of the finance function
• One

Key Words and Terms

1.
2.
A word
Aterm
Specification
5.1 – Role of the finance function
5.1 – The Finance Function
• The “Finance Function” is the part of a business responsible for managing,
monitoring and advising on all aspects of finance and cashflow

• F in an ce – The management, or supply, of money in a business

• Function – Adistinct, organisational part of a business. Asynonymof “department”

Role of the Finance Function
• The finance function is responsible for:
• Providing information:
• Monitoring the financial performance of the business in terms of
• Profit/Loss
• Costs/Revenues
• Average rate of return

• Supporting or affecting decision making

• Future planning
• Forecasting
• Planning budgets and spending
Task
• The role of the Finance Function is largely common sense

• The Finance Function clearly demonstrates the “in terd ep en d en cy ” in b u sin ess
and so much of this content is covered elsewhere/again in the future

• To investigate further, lets open the worksheet from the shared area and
co m p lete task s 1 an d 2
Exam Question
Homework
• Have a watch of the following video:

• Not everything is relevant to us, but knowledge is power and most of this is in your
ex am

https://www.youtube.com/watch?v=JSIfwHDpkro
Review
• You should now know:
• The definition of finance and “the finance function”
• The role of the finance function in a business
• H o w fin an ce affects th e d ecisio n m ak in g an d d irectio n o f a b u sin ess
5.2 - Sources of Finance
• The “F in an ce F u n ctio n ” is:

• “The department, person or owner who is responsible for managing the money
that a business needs in order to operate.”

• It is important to understand:
• A business needs finance for all operations at all stages of their development
• The way in which finance is raised must be appropriate in terms of
• How much is needed
• How it is raised
• The future effects of this (e.g. interest rates on borrowing)
Needs
• Abusiness of any kind may need finance in order to:
• Cover day to day running costs
• Establish the business
• Buy equipment
• Expand
• Recruit
• Develop or market products

• This is not an exhaustive list – the need for finance is almost endless
Methods
• Until now we have covered only three methods of raising capital or financing
an opportunity:
• Existing capital (savings)
• Borrowing (e.g. bank loan)
• Share issue/sale

•W e n eed to b reak th is d o w n fu rth er

Internal Finance
Internal Finance
• Apple’s cash pile is known as “retained profit” – money they have deliberately kept as cash
to use as the business sees fit .

•O th er so u rces o f in tern al fin an ce are:

• Owner capital-savings
• Selling assets
• Taking on new partners
• Retaining profits (as above)

• The advantages of this should be obvious…

Internal Finance
Taking on partners dilutes control
Only works if the business is
making healthy profits
Finite – there are only so many
assets that can be sold, only so
much owner capital etc
May result in future cash flow
issues

No cost associated
Leaves other borrowing options
open in case they are needed in
future
No monthly payments
Instant availability
Usually no loss of control
External Finance
• Depending on the size of business and finance requirements, external finance may
be necessary

• External finance options are numerous and must be chosen carefully .

Unsuitable finance can lead to significant problems.

•E x am p les o f ex tern al fin an ce in clu d e:

• Trade credit
• Overdraft
• Loan
• Crowd funding
• Share issue
External Finance
Debt must be repaid

Monthly payments may cause cash flow

issues

Interest may be charged

Crowdfunding may fail or take too long

Can result in a loss of control

May be able to borrow very large sums

Payment terms can be adjusted to suit
business needs (months, years, decades)
May be more acceptable to shareholders
Can offer a business flexibility during
temporary cash flow issues
Does not result in loss of control unless
issuing shares
Exam Question
Exam Question

Analysis – What is the impact of your

Knowledge (point – AO1)
point? (AO3)

Application – develop or illustrate in

context your argument with
something from the text (evidence –
AO2)
 Analysis – What is the impact of your
Knowledge (point – AO1)
point? (AO3)

Application – develop or illustrate in

context your argument with
something from the text (evidence –
AO2)
You should “make a supported judgement” in your answer.

Use the sentence starters to help you:

I recommend …. because…
Share issue/retained finance is most advantageous because…
Whilst Share issue/retained finance is only... / would only be sensible if…

Answer Structure:
Recommendation
Reason why your choice is so significant
Reason why the alternative option doesn’t cut it
Exam Question
 Analysis – What is the impact of your
Knowledge (point – AO1)
point? (AO3)

Application – develop or illustrate in

context your argument with
something from the text (evidence –
AO2)
Homework
• We are about to approach one of the most fundamental and important stages of any business studies course:

• Profit and Loss!

• This literally IS business in a nutshell. For next lesson can you use your knowledge organiser and any other
source of information to find out the definitions and calculations (how to work it out) for:

1. Revenue

2. Fixed costs

3. Variable costs

4. Total costs

5. Gross profit

6. Net profit

7. Gross and net profit margins

Next lesson we do some serious maths!

Review
• You should now know:
• The reasons business need finance
• The definition of “the finance function”
• Sources of finance
• Long, medium and short term methods of finance
• Advantages and disadvantages of each finance source
Final accounts
• Income Statements: is a financial document of the business that records all income
generated by the business as well as the costs incurred by the business and thus the profit
or loss made over the financial year. Also known as profit and loss account. Profit = Sales
Revenue – Total cost

• Statement of Financial Position: The balance sheet, along with the income statement is
prepared at the end of the financial year. It shows the value of a business’ assets and
liabilities at a particular time. It is also known as ‘statement of financial position’.

SHAREHOLDERS EQUITY = TOTAL ASSETS – TOTAL LIABILITIES

TOTAL ASSETS = TOTAL LIABILITIES + SHAREHOLDERS EQUITY

CAPITAL EMPLOYED = SHAREHOLDERS EQUITY + NON-CURRENT LIABILITIES

• Cash Flow Statement: is a financial statement that provides aggregate data regarding all
cash inflows that a company receives from its ongoing operations and external investment
sources.
Ratio Analysis
 Profitability Ratios: profitability is the ability of a company to use its resources to generate revenues in excess

of its expenses. These ratios are used to see how profitable the business has been in the year ended.

• Return on Capital Employed (ROCE):

• Gross Profit Margin:

• Net profit Margin:

 Liquidity Ratios: liquidity is the ability of the company to pay back its short-term debts. It if it doesn’t have the

necessary working capital to do so, it will go illiquid (forced to pay off its debts by selling assets).

• Current Ratio:

• Liquid Ratio/ Acid Test Ratio: