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UPDATED TO 2023-2025 SYLLABUS

CAIE IGCSE
BUSINESS STUDIES
SUMMARIZED NOTES ON THE THEORY SYLLABUS
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CAIE IGCSE BUSINESS STUDIES

Sale of Inventories
1. Financial Information and Advantages Disadvantages
Decisions Reduces opportunity cost.
It may disappoint customers if a
sudden change in demand is not
met.
1.1. Why does a Business Need Reduces storage costs.
Finance? Owner’s Savings
Finance: money that is needed to meet the expenses of Advantages Disadvantages
a business. This is known as capital. Quick availability Savings may be low
Capital is needed for: Increases risks for owners, as they
Starting up a business No interest is paid
might have unlimited liability.
Expansion
Increase working capital External Sources of Finance
Capital Expenditure: money spent on non–current
assets. Issue of Shares: Sale of business shares (only for limited
Revenue Expenditure: money spent on day-to-day, companies)
recurring expenses.
Advantages Disadvantages
The Responsibilities of the Finance Department A permanent source of capital Dividends are paid after tax.
It doesn’t need to be paid back Shareholders expect dividends.
Recording all financial transactions Ownership will change if many
Prepare final accounts No interest
shares are sold.
Cash flow forecast
Make important decisions Bank Loans: A sum of money from a bank repaid with
Provide info to managers interest.

1.2. Sources of Finance Advantages Disadvantages

Quick, easy to arrange Must be repaid with interest
The primary sources of capital include: Available for varying lengths of Security or collateral security
time. must be given
Internal Sources: Obtained from within the business
itself. Large companies receive low-
interest rates if large sums are
External Sources: Obtained from outside and taken.
separate from the business.
Selling Debentures
Internal Sources of Finance
Debentures are certificates issued to a debenture
Retained Profits: Profit businesses obtain after costs. holder for the money they lent, which must be repaid
within 20 – 25 years.
Advantages Disadvantages
Advantages Disadvantages
The new business will not have
It does not have to be repaid. Loans must be repaid, and interest
any. Long term finance
must be paid.
Small firms’ retained profit may
It doesn’t incur interest.
be low to finance the expansion.
Reduces payment to owners,
Debt Factoring
e.g., dividends for shareholders. Debt factors are specialist agencies that buy the
claims of debtors of firms for immediate cash.
Sale of Existing Assets Advantages Disadvantages
Advantages Disadvantages The firm doesn’t receive 100%
Availability of immediate cash
amount
It can take time to sell the
assets, and the amount may The risk of collecting the
Better use of unwanted capital debtors becomes the factor,
not be the same as when
purchased. not the business’s.
Doesn’t increase the debts of a Source of finance not available
business for new businesses. Grants and Subsidies

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CAIE IGCSE BUSINESS STUDIES
Advantages Disadvantages Advantages Disadvantages
Don’t have to be repaid Given with strings attached Almost an interest-free loan May not provide discounts
Reduces cash outflows in the
Microfinance short run
Providing financial services to poor people not
secured by traditional banking. Factoring of Debt

Advantages Disadvantages Long-Term (Loans Available for More than a Year)

Small loans can be obtained by
start-ups (especially if it’s by High-interest rates Bank Loans
simple people) They are payable over a fixed period
Greater risk for the lender Hire Purchase
It allows a business to buy a fixed asset over a long
Crowdfunding period with monthly payments, including interest.
Funding a project or venture by raising money from
numerous people who each contribute a relatively Advantages Disadvantages
small amount. Doesn’t have to find a large
A cash deposit is paid at the
cash sum to purchase the
start of the month
Advantages Disadvantages asset
Crowdfunding platforms may High-interest rates
It's a fast way to raise a
reject the proposal if it is not
substantial sum.
done well. Leasing
No initial fees are payable to It allows a firm to use an asset without paying for it.
If the total amount is not
the platform; only when the
raised, money invented by
goal is reached a % will be Advantages Disadvantages
others will have to be repaid.
taken. Doesn’t have to find a large The total cost of leasing
Media interest and publicity cash sum to purchase the changes will be higher than
It allows public opinion to be
are needed for a chance of asset purchasing the asset.
heard to see if the idea is good.
success. Maintenance is taken care of
It is often used by by the leasing company.
entrepreneurs when other Competitors could steal the
traditional methods are not idea.
Issue of Shares
available.
Only available to limited companies
Debentures
Short vs. Long-term Sources Long-term Loans or Debt Finance - this is different
from share capital:
Short-term finance (shortage of cash in the short term can
Loan interest is paid before tax and is an expense.
be overcome in 3 ways):
Loan interest must be paid every year.
Overdrafts The loan must be repaid.
Often ‘secured‘ against particular assets.
Advantages Disadvantages
‘Overdraw‘ (spend more money Factors When Choosing the Source of Finance
Interest rates are variable (vary
than is currently in the
from each overdraw)
account)
The bank can ask for the
Flexible form of borrowing
overdraft to be paid quickly.
Interest will be paid only in the
amount overdrawn.
Overdrafts are cheaper than
short-term loans.

Trade Credit
It is when businesses delay payments to suppliers

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CAIE IGCSE BUSINESS STUDIES

The main factors considered in making the financial Cash is a Liquid Asset: it can be immediately available to
choice: spend on goods & services.
Size of business & Legal Form (type of business): Cash Flow: the cash inflows (money received by
Public limited companies have a larger choice of business) & outflows (money paid) over some time.
sources of finance because they pay less interest Cash Inflow: money coming into the business.
(less risk). Sale of goods
Amount of Capital Required: if you need just a little Sale of assets
money, you won’t issue new shares. Payments to debtors
Purpose of Capital & Time Period: The general rule Borrowing money
is that the finance source should match the financial Investors
need: Cash Outflow: money going out of the business.
If the use of capital is long-term, the source Purchase of goods
should be long-term (same with short-term). Purchase of non-current assets
Existing Loans (risk and gearing ratio): If a Payments of salaries
business has already taken out many loans, banks Repaying loans
will think it is too risky to finance. Trade payables
Gearing: measures the proportion of total capital
raised from long-term loans. Cash Flow Cycle
Common Reasons The Banks Refuse to Loan to It shows the stages between paying out cash and
Small Businesses receiving cash.
1. Cash outflow to pay for materials, rent, etc.
Weak cash flow 2. Goods produced
Lack of security or collateral. 3. Goods sold
Poor preparation by the business owner when applying 4. Cash payment received for goods sold (cash
for the loan. inflow)
The longer it takes for the cash flow cycle to be
Banks Need These to Lend completed, the greater the working capital.
Cash flow is not the same as profit.
Cashflow forecast Profit consists of goods sold on credit, whereas cash flow
Business plan is a business's cash sales in a month.
Collateral/security When profitable businesses run out of cash, it is known
Forecast income statement available as insolvency
Due to:
1.3. Cash-Flow Forecasting and Over-trading
Long credit time
Working Capital Less credit time received
Many fixed assets purchased

Cash Flow Forecast

Cash-Flow Forecast: an estimate of a business's future
cash inflows and outflows on a month-by-month basis.
Shows the expected cash balance at the end.
Closing Cash Balance: the amount the business holds at
the end of each month.
Opening Cash Balance: the amount the business holds
at the start of each month.
Net Cash Flow: The difference between the cash inflow
and outflow (inflow – outflow)

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CAIE IGCSE BUSINESS STUDIES
January February March
Opening bank balance (A) 10,000 15,000 (5,000) In the short run, it is the capital available to a business to
Cash inflow (B) 35,000 45,000 50,000
pay for day–to–day expenses.
Cash outflows (C) 30,000 65,000 40,000 Working Capital = Current Assets – Current Liabilities
Net cash flow (D=B-C) 5,000 (20,000) 10,000
Closing bank balance (=A+D) 15,000 (5,000) 5,000 Working capital can be in the form of:
Cash
Uses of Cash Flow Forecast Value of debtors
Value of inventory
Starting up a business Working capital should be handled properly because it
The first few months are crucial to every business, as shows investors & banks how efficient a business is and
owners don’t realise the amount of cash needed, its financial strength.
which is why they fail.
Businesses need to spend on labour, land, and 1.5. Income Statements
capital. They even have to advertise and promote
extensively. Accounts: the financial records of a firm’s transactions.
Many owners don’t understand the importance of Accountants: professionally qualified people who are
cash flow in a business, so they fail. responsible for keeping accurate accounts and
Keeping the bank manager informed producing final accounts.
A cash flow forecast will help a business receive a Final Accounts: These are produced at the end of the
loan. financial year and give details about the profit/ loss made
The bank manager needs to know when the amount over the year and the worth of the business.
is needed, for how long, and when it will be repaid. The simple equation for profit:
Managing an existing business Profit = Sales revenue – total costs
Managing cash flow Profit can be increased through:
Businesses with high bank balances can use their Increasing the sales revenue so that it is higher than
cash effectively in other areas. the production costs.
Reducing the production costs.
How do you Overcome Cash Flow Problems? A combination of the two.

Short Term Solutions Importance of Profits

Increasing bank loans will inject more cash into the
business, but interest and loan must be paid.
Delaying payments to suppliers will decrease cash
outflows in the short run, but suppliers may refuse to
provide discounts or supply.
Reducing credit periods may help a business increase
short-term cash inflows, but customers may switch to
competitors.
Delaying the purchase of fixed assets will reduce cash
outflows, but in the long run, a company may lack
efficiency as they don’t have up–to–date technology.
Long Term Solutions

Attracting new investors

Cutting costs and increasing efficiency using lean
production.
Develop new products

1.4. Working Capital

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CAIE IGCSE BUSINESS STUDIES

Importance for Private Sectors: Income Statement: a financial statement that records
Reward for enterprise the income of a business and all costs incurred to earn
Entrepreneurs have special qualities, and they that income over some time.
must earn rewards for that. Managers, banks and other investors will use it to see if a
Reward for risk-taking business is making a profit:
Shareholders/investors/owners take risks when To compare with previous years - if it is greater than
they provide capital; profits reward those risks. the year before
Payments act as incentives to invest more and To compare to competitors
make the business profitable The main features of an income statement include:
Source of Finance Revenue: the income to a business from the sales of
Profits after payments can be used to fund goods and services.
expansion Equation: Units sold x Price per unit
Indicator of Success Costs of Sales: the cost of production or buying the
Profits show that investing can be profitable, but goods the business sells during a period.
losses show that investment must not be made. Equation: Opening inventories + Purchases –
However, Profit ≠ Cash as profit is derived from Closing inventories
revenue, but cash can be derived from many Gross Profit: the profit made in revenue is greater
places (e.g. selling assets like cars). than the cost of sales.
Importance of profit to the public sector: Equation: Revenue – Cost of sales
Used as a source of finance to develop the state- Trading Account: shows how gross profit is
owned business or be more efficient. calculated.
Importance of profit to social enterprise: Net Profit: the profit the business makes after
Balance profit-making with their aims, as profit is deducting all costs.
used for the firm's survival. Equation: Gross profit – Overhead costs (Fixed
costs)
Understanding Income Statements Depreciation: the fall in the value of a fixed asset
over time.
Retained Profit: the net profit, after taking away
taxes and payments to owners – which is reinvested
into the business.
Limited companies will have in their income
statements:
Corporation tax is paid from net profit.
Dividends paid to shareholders.
Retain profit after these two deductions.
Results from the previous year will allow for easy
comparisons.

Example of Income Statement

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CAIE IGCSE BUSINESS STUDIES
2018 2017
Revenue $1250 $1300 Statement of Financial Position – a document that
Cost of sales – $900 – $900
shows the value of the business’s assets and liabilities at
a time.
Gross profit $350 $400
Assets: Items of value owned by a business.
Expenses, including interest paid – $155 – $160
Current Assets: (Short-term Assets) Items owned by
Net profit $195 $240
the business for less than 1 year, i.e. Raw material,
Corporation tax – $35 – $40 cash.
Profit after tax $160 $200 Non-Current Assets: (Long-term Assets) Items
Dividends – $120 – $130 owned by a business for more than 1 year, i.e.
Retained profit for the year $40 $70 Buildings, land, company cars.
Liabilities: debts owed by the business.
Uses of income statement: Current Liabilities: (Short Term Liabilities) Debts
Know the profit/loss made. owed by business for less than 1 year, i.e. bank
Compare their performance. overdrafts and wages.
Profitability of individual products. Non-current liabilities: (Long-term Liabilities) debts
Products to launch. owed by a business for more than 1 year, i.e., long-
term bank loans and creditors (money the business
1.6. Statement of Financial Position owes to suppliers).
The Total Equity (AKA Shareholders’ funds) is how
much a business is worth. (only for limited
companies).
Shareholders’ Funds = Total Assets – Total
Liabilities
The shareholders’ funds are the total money invested
in a business by the shareholders/owners.
This money can be invested by either share capital
or reserves (Retained profit and loss).
If the total equity of a business has increased/fallen,
the shareholder’s stake in the company will be worth
more/less, respectively.

Example of Statement of Financial Position

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CAIE IGCSE BUSINESS STUDIES
Assets 2018 ($00) 2017 ($00)
Non-current (fixed assets): 1.8. Users of Accounting Information
Land and buildings 450 440
Machinery 700 $600 Managers
1150 1040 They will help them keep control over the
Current assets: performance of each product.
Inventories 80 50 Help decision-making
Account receivables (debtors) 50 60 Ratios are a quick way for managers to compare their
Cash 10 15 ratios with other businesses and previous accounts.
140 125 Shareholders
Total Assets 1290 1165 Shareholders and potential investors want to know
Liabilities:- how big a profit/ loss the company has made.
Current liabilities: They will want to check the profitability and liquidity
Account payables (Creditors) 65 40
ratios and decide whether shareholders have to buy
more shares.
Bank Overdraft 65 60
Creditors/Trade Payable
130 100
Liquidity ratios indicate the ability of the company to
Non-Current liabilities:
pay back its debts.
long-term bank loans 300 245 Banks
Total Liabilities 430 345 Risk of illiquid, no lending.
Total Assets - Total Liabilities 860 820 Government
Share capital 520 500 To check the tax revenue, whether the firms are
Profit and loss reserves 340 320 paying the right taxes.
Total Shareholders’ funds/equity 860 820 Workers and trade unions
They just want to assess whether the company's
Interpreting Balance Sheets future is secure.
Access the profits to help unions improve wages and
Shareholders can see the value of their stake working conditions of employees.
Shareholders can also analyse how expansion has been Other businesses – competitors
paid for by long-term loans, retained profit, or increased The managers will compare their profitability and
share capital (sales of shares). liquidity with other businesses.
You can calculate the Working Capital.
Working Capital = Current Assets - Current Limitations of Accounting Records and Ratio
Liabilities Analysis
You can also calculate the Capital Employed – the long-
term and permanent capital invested in a business. Managers have access to all account data; external users
Capital Employed = Non-Current Liabilities + Total only have what the business requires to show by the law.
Equity Ratios are based on past accounting data and can not be
Alternative Formula used to forecast future business performance.
Return on capital employed (ROCE) = 100 X Profit Accounting data over time will be affected by inflation,
before tax/ capital employed Where Capital and comparisons can be misleading.
employed = Non-current liabilities + Shareholders Different companies may use different ways of
fund = Total assets – Current liabilities accounting. Therefore, comparisons may be difficult.

1.7. Analysis of Accounts

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CAIE IGCSE
Business Studies

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