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Pearson Edexcel Business IAS Complete Revision Notes Unit
2: Managing Business Activities (Paper/Unit code: WBS12
CHAPTER 23: PLANNING
I. Business plan
A plan for the development of a business, giving details such as the products to Business plan is:
be made, resources needed & forecasts such as costs, revenues & cash flow.
Initially, new businesses will create a plan to follow butchanges in external o Mainly created
factors will lead to changes in business plans. by the owner
Business plan is a written document by the business regarding its operations. o For future use
II. Relevance of a Business Plan
A business plan is needed to support applications for finance, both at the start-up stage & in the future. Lenders
& other investors are not likely to put moneyinto a business unless the owners can provide a clear, concise
vision of futureprogress & profitability.
In particular, investors will want to know how their money is going to be spent &when & how they are going to benefit
from their investment.
III. Uses of a business plan
1. To show a clear direction for the development of a business.
2. Help show lenders & investors that the owner is cautious, responsible, serious &credible.
3. To flag up potential problems in advance so that investors are aware & solutionscan be found.
When the business creates a business plan, they can see the potentialproblem in advance & find solution.
e.g., If the business decided to expand in the future, then they will have to increase their production. The problem
is the source of finance. As a result, theycan think of in advance where they will get the finance.
IV. Contents of a Business Plan
1. An executive summary-usually business plan is very lengthy. So, there should bea summary of the whole
business plan included on the business plan itself.
2. The business opportunity-a description of the product/ range of products to bemade, the quantity to be sold &
the estimated price.
3. Financial forecasts-It must be written in the business plan the cash outflows &inflows.
e.g., sales forecast, cash flow forecast
4. The business & its objectives-the name of the business, its address, its legalstructure & its aims &
objectives.
5. Personnel-who will run the business, how many employees.
6. Finance-where the finance to start up & run the business will come from.
7. Premises & equipment-premises to be used, equipment which needs to beobtained & financed.
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CHAPTER 24: INTERNAL FINANCE
Internal Finance-money generated by the business/its current owners.
I. The need for finance
Firms need money to get started. They might need to buy equipment, rawmaterials & obtain premises.
However, business is a continuous activity & money flowing in may use to buy more raw materials & settle other
trading debts. If the owner wants to expand,which means larger premises, more equipment & extra workers. A
business will need to find a way of raising finance.
II. Types of Internal Finance
1. Owner’s Capital Capital-the money
In most cases, a business cannot start unless the owners provide capital provided by the
of their own. Providing capital is part of the risk taken by owners in a business.
entrepreneurswhen setting up a business.
Owners provide capital from their own personal resources. A common source is personal savings. Some
entrepreneurs have deliberately saved upover a period of time so that they can start their own business.
Personal savings would be an appropriate source of finance for a soletrader/partnership.
2. Retained profit
Retained profit-is the profit after tax (corporation tax) that
is put back into business & not returned to the owners.
Retained profit is when dividends (profit of shareholders) are not Shareholders-owners
returned to shareholders &are reinvested into the business. If retained of the business.
profit is
used by the business, shareholders will not object even they will not be receiving their dividends
because if it is reinvested again in the business then they will be receiving higher dividend/ profit in the
future.
Retained profit is a flexible source of finance. It does not have to be used immediately. It can be
accumulated by a business in a bank account where it will earn interest. A business can then use the
retained profit at alater date. If a business does not make a profit, retained profit is not possible as a
source of finance.
3. Sale of assets
Asset sales can be used by all businesses, as long as they are not a start-upbusiness (since the business will
have no assets.)
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An established business may be able to sell some unwanted assets to raisefinance.
e.g., Machinery, land & buildings that are no longer required could be sold offfor cash.
Pros & Cons of Internal Finance
Pros Cons
The capital is available immediately- there is no time Internal finance can be limited-a business may not be
delay between identifying a need for finance & obtaining sufficiently profitable to use retained profit or maynot
it. For example, retained have unwanted assets to sell. Also,
profit will be in a bank account ready &waiting. the current owners may not have anypersonal
resources to contribute.
Internal finance is cheap-there is no interest Internal finance can be inflexible compared to external
payments which means that costs will be lower & sources of finance. There are a wide variety of
profit higher. funding options for external finance, which can give the
business flexibility.
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CHAPTER 25: EXTERNAL FINANCE
I. External Finance
Money raised from outside the business.
May not always be available because business start-ups have no trading record & present too much risk for many
lenders. However, once a business has survivedthe initial ‘uncertain’ stages of business development, external
sources of finance can be an option.
II. External Sources of Finance
1. Family & friends
Common source of finance for small businesses.
Money might be gifted to an entrepreneur. For example, a parent mightgive their child a sum of money as
a present to help them get started.
Pros: Family & friends may not want ashare in the Cons: If the terms of the arrangementlack clearness
business & will not be able to interfere in the running this could lead to the loss of friendship/a breakdown
if the business. in family relations.
2. Banks
Some businesses can borrow their desired amount of money from bank. Thisborrowing of money from the bank is
called loan.
Banks will be involved in a business start-up because businesses need a bankaccount to facilitate financial
transactions with customers & suppliers.
A formal application is required to get finance from banks & it will probablybe necessary to provide a
business plan.
However, borrowing from banks means the business will have to pay interest.
3. Peer to Peer Lending(P2PL)
Involves people lending money to unrelated individuals/’peers’ & thereforeavoiding the use of a bank.
When a group of people form a group & raise fund to lend to other people.
All transactions take place online.
Lenders may choose which borrower to lend to.
Pros Cons
Interest rates are better for bothborrowers & All loans are unsecured which meansthere is no
lenders than thoseoffered by a bank. protection for lenders.
Therefore, lenders might lose their
money if a borrower neglect to payback.
Very convenient because it can becompleted
online quickly.
4. Business angels
Business angels are individuals who typically may invest between £10,000 &
£100,000+, often exchange for a stake in a business.
Most investments are in business start-ups/ in early stages of expansion.
