Section 5
Financial Information & Decisions
Covers how businesses raise finance, manage cash flow, interpret financial statements, and analyse accounts to support decision-making. A heavily examined section requiring both knowledge and numerical skill.
Select a topic from the sidebar. Each topic includes key definitions, core concepts, and examiner tips. Work through them in order or jump to the topic you need. Pair with the topical past papers for best results.
Section 5 Topics
5 topicsWhy Businesses Need Finance
To start up, expand, cover day-to-day running costs, or fund new product development. The purpose affects which source is most suitable.
Internal Sources
Finance from within the business — retained profit, selling assets, reducing working capital. No interest or loss of control.
External Sources
Finance from outside — bank loans, overdrafts, share issue, debentures, trade credit, leasing, microfinance, crowdfunding.
Choosing a Source
Depends on the amount needed, time period, cost of finance, size of business and whether owners want to retain full control.
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Cash vs Profit
A business can be profitable but still run out of cash. Cash flow tracks the actual movement of money in and out of the business.
Cash Flow Forecast
A prediction of future cash inflows and outflows. Shows the expected opening and closing cash balance each month.
Working Capital
Current Assets − Current Liabilities. The funds available for day-to-day operations. Too little causes cash flow problems.
Improving Cash Flow
Negotiate better credit terms, reduce stock levels, chase debtors faster, arrange an overdraft, or cut unnecessary spending.
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Revenue
Total income from selling goods or services. Revenue = Price × Quantity sold. Also called turnover or sales revenue.
Gross Profit
Revenue − Cost of Goods Sold. Shows profit before overheads are deducted. Reflects how efficiently the business produces its goods.
Profit for the Year
Gross Profit − Expenses (overheads). The “bottom line” profit after all costs are deducted. Also called net profit.
Using the Income Statement
Compares performance over time or against competitors. Falling gross profit may signal rising costs or falling prices.
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Non-Current Assets
Long-term assets owned by the business — property, machinery, vehicles. Used over many years and depreciate over time.
Current Assets
Short-term assets — cash, inventory, trade receivables. Expected to be converted into cash within 12 months.
Liabilities
Current liabilities (due within 1 year): trade payables, overdrafts. Non-current liabilities (due after 1 year): long-term loans.
Equity
The owners’ stake in the business. Equity = Total Assets − Total Liabilities. Includes share capital and retained earnings.
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Gross Profit Margin
(Gross Profit ÷ Revenue) × 100. Shows how much profit is made per $1 of revenue before overheads. Higher = more efficient production.
Net Profit Margin
(Profit for Year ÷ Revenue) × 100. Shows overall profitability after all costs. Falling margin may indicate rising overheads.
Return on Capital Employed (ROCE)
(Profit ÷ Capital Employed) × 100. Measures how efficiently the business uses its capital to generate profit.
Liquidity Ratios
Current Ratio = Current Assets ÷ Current Liabilities. Ideal range: 1.5–2. Shows ability to pay short-term debts.
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