Chapter 3: Finance and Accounts
3.1 Sources of Finance
● Internal Finance:
○ Personal funds: Owners invest their own money (e.g., a baker uses
savings to open a shop).
○ Retained profit: Profits kept in the business, not paid out (e.g., Apple
reinvests billions in new products).
○ Sale of assets: Selling unused equipment (e.g., a school sells a minibus
it no longer needs).
● External Finance:
○ Share capital: Selling shares to raise money (e.g., Facebook’s IPO).
○ Loan capital: Borrowing from banks (e.g., a hotel takes out a loan to
build a new wing).
○ Overdrafts: Short-term borrowing—spending more than is in the account
(e.g., a retailer covers a temporary cash shortfall).
○ Trade credit: Buying now, paying suppliers later (e.g., a supermarket
pays for goods after selling them).
○ Grants/subsidies: Money from government or charities, often for specific
projects (e.g., Tesla received subsidies for electric car production).
○ Leasing: Renting equipment instead of buying (e.g., a taxi company
leases cars).
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3.2 Costs and Revenues
● Fixed Costs: Do not change with output (e.g., rent for a restaurant).
● Variable Costs: Change with output (e.g., cost of food ingredients for every
meal sold).
● Semi-variable Costs: Have both fixed and variable parts (e.g., a phone bill with
a basic fee + extra call charges).
● Total Costs = Fixed Costs + Variable Costs
● Revenue: Money earned from sales: Revenue = Price × Quantity Sold (e.g., if
Starbucks sells 100 coffees at $3 each, revenue = $300).
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3.3 Break-even Analysis
● Contribution per unit = Selling price – Variable cost
E.g., Lemonade sells for 2, costs 0.50 to make, contribution = $1.50
● Break-even Output = Fixed Costs / Contribution per unit
● Margin of Safety = Actual Sales – Break-even Sales
● Break-even Chart: Visual tool (lines for revenue, costs, and break-even point).
● Uses: Sets sales targets, helps decision-making.
● Limitations: Assumes all units are sold, ignores qualitative factors.
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3.4 Final Accounts
● Profit and Loss Account (Income Statement):
○ Revenue
○ Cost of goods sold (COGS): Direct costs of making goods
○ Gross profit = Revenue – COGS
○ Expenses (e.g., wages, rent)
○ Net profit = Gross profit – Expenses
E.g., A bakery earns 10,000,spends
10,000, spends 4,000 on flour (COGS), 2,000 on wages (expenses) :
Gross profit= 6,000, Net profit = $4,000.
● Balance Sheet: Snapshot of assets, liabilities, and equity at a point in time.
○ Assets: What the business owns (cash, inventory, property)
○ Liabilities: What it owes (loans, payables)
○ Equity: Owner’s share (Assets – Liabilities)
○ E.g., Home Depot’s balance sheet lists billions in assets (stores, stock),
liabilities (loans), and equity (shareholder value).
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3.5 Ratio Analysis
● Profitability Ratios:
○ Gross Profit Margin = (Gross Profit / Sales) × 100%
○ Net Profit Margin = (Net Profit / Sales) × 100%
○ ROCE = (Net Profit / Capital Employed) × 100%
● Liquidity Ratios:
○ Current Ratio = Current Assets / Current Liabilities
○ Acid-test Ratio = (Current Assets – Stock) / Current Liabilities
● Efficiency Ratios:
○ Stock Turnover, Debtor Days, Creditor Days, Gearing Ratio
● Uses: Compare performance over time or vs. competitors (e.g., compare Nike
and Adidas).
● Limitations: Ratios don’t show qualitative factors (e.g., staff morale).
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3.6 Budgets and Cash Flow
● Budget: A financial plan for expected income and spending.
○ Example: A school sets a budget for buying new computers.
● Cash Flow Forecast: Predicts when money will come in and go out.
○ Cash Inflows: sales, loans, investments
○ Cash Outflows: rent, wages, bills
● Cash Flow Problems: Can cause a profitable business to fail (e.g., a
construction firm has unpaid invoices and can’t pay suppliers).
● Improving Cash Flow: Speed up inflows (discounts for early payment), slow
down outflows (negotiate payment terms), use overdraft.
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3.7 Investment Appraisal
● Payback Period: How long to recover initial investment (e.g., spend $12,000,
earn $4,000/year → payback = 3 years).
● Average Rate of Return (ARR):
○ ARR = (Average Annual Profit / Initial Investment) × 100%
● Net Present Value (NPV): Takes the value of future money into account
(discounts cash flows).
● Uses: Compare projects (e.g., a hotel chain chooses the best location for new
hotel).
● Limitations: Relies on estimates; ignores non-financial factors.
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Chapter 4: Marketing
4.1 The Role of Marketing
● Marketing: Satisfying customer needs profitably.
● Market Orientation: Focus on customer needs (e.g., Amazon).
● Product Orientation: Focus on product quality/innovation (e.g., Apple’s design
focus).
● Marketing Objectives: Increase sales, market share, brand awareness,
customer loyalty.
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4.2 Marketing Planning
● Market Segmentation: Dividing the market (age, gender, income, etc.)
E.g., BMW targets luxury segment, Kia targets budget segment.
● Targeting: Choosing which segments to serve.
● Positioning: How the product is seen vs. competitors (e.g., Volvo = safety).
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4.3 Sales Forecasting
● Methods:
○ Moving average: Smoothing data trends.
○ Extrapolation: Predicting future sales based on past trends.
● Limitations: Past trends may not continue (e.g., sudden changes like
COVID-19).
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4.4 Market Research
● Primary (Field) Research: Surveys, interviews, focus groups (e.g., Nike
surveys runners about shoe comfort).
● Secondary (Desk) Research: Existing data—reports, internet (e.g., a startup
checks government market data).
● Qualitative vs. Quantitative: Feelings/opinions vs. numbers/statistics.
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4.5 The Marketing Mix (4Ps/7Ps)
● Product: Features, design, quality, packaging, branding.
E.g., Coca-Cola's bottle shape and logo.
● Price:
○ Cost-plus, penetration, skimming, psychological, loss leader, price
discrimination, price leadership, predatory pricing.
E.g., Apple uses skimming for new iPhones; supermarkets use loss leaders.
● Promotion:
○ Above the line: Mass media (TV, radio, newspapers).
○ Below the line: Direct mail, sponsorship, social media, sales promotions.
E.g., McDonald's TV ads (above the line), coupons (below the line).
● Place: Distribution channels (retail, e-commerce, direct to consumer).
E.g., Dell sells direct online; Pepsi goes through wholesalers/retailers.
● *(7Ps for services: + People, Process, Physical evidence.)
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4.6 Product
● Product Life Cycle: Introduction, growth, maturity, decline.
E.g., Fidget spinners: rapid intro/growth, quick decline.
● Boston Consulting Group (BCG) Matrix: Stars, Cash Cows, Question Marks,
Dogs.
E.g., Apple's iPhone = Star/Cash Cow; iPod = Dog (decline).
● Branding: Name, symbol, design (e.g., Nike swoosh).
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4.7 Price
● Strategies:
○ Penetration (low price to enter), skimming (high price then lower),
competitive, psychological (e.g., $9.99), cost-plus, etc.
○ Price Elasticity of Demand (PED): How sensitive customers are to price
changes (e.g., salt = inelastic; luxury cars = elastic).
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4.8 Promotion
● AIDA Model: Attention, Interest, Desire, Action.
● Promotional Mix: Advertising, sales promotions, public relations, direct
marketing, personal selling, sponsorship.
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4.9 Place (Distribution)
● Channels: Direct (producer → consumer), retailer, wholesaler.
E.g., Amazon (direct), supermarkets (retailer).
● E-commerce: Online sales (e.g., ASOS).
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4.10 International and Digital Marketing
● International Marketing: Adapting marketing strategies for different countries
(e.g., KFC’s local menus).
● Digital Marketing: Using websites, social media, apps (e.g., Starbucks app,
Nike on Instagram).
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How to Revise These Chapters Step-by-Step
1. Start with Key Terms: Make flashcards for every concept above.
2. Learn the Formulas: Practice calculations for break-even, ratios, investment
appraisal.
3. Draw and Label Diagrams: Product life cycle, BCG, break-even chart, cash
flow, balance sheet, etc.
4. Explain Concepts in Simple Words: Try teaching a friend!
5. Use Real-World Examples: Link each concept to a business you know.
6. Answer Exam-Style Questions: Practice calculations, explanations,
applications, and evaluations.
7. Review Strengths and Limitations: For every method, be ready to discuss pros
and cons.
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Summary Table: Key Concepts and Examples
Topic Key Idea / Example
Retained Profit Apple reinvests profits in R&D
Break-even Point A bakery needs to sell 100 cakes to
cover all its costs
Payback Period Hotel recoups investment in 3 years
BCG Matrix iPhone = star/cash cow, iPod = dog
Skimming Price New iPhone starts high, then drops
Psychological 9.99feelscheaperthan
Pricing
9.99feelscheaperthan10
E-commerce Amazon sells directly online
Segmentation BMW targets luxury, Kia targets budget
Above/Below the TV ads (above), coupons (below)
Line
TQM Toyota's company-wide quality
approach
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This guide covers every topic and subtopic in Chapters 3 and 4. For each, know the
definition, how it works, real-life example, and at least one advantage and limitation.
Practice calculations and diagrams, and always be ready to apply your knowledge to a
business scenario!
IMPORTANT QUESTIONS FROM THESE CHAPTERS
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Chapter 3: Finance and Accounts
3.1 Sources of Finance
1. Define “retained profit” and give one advantage and one disadvantage for a
business using it.
2. Explain the difference between internal and external sources of finance, giving
one example of each.
3. A business wants to buy new machinery. List two suitable sources of finance
and justify your choices.
3.2 Costs and Revenues
1. Define fixed costs and variable costs, with one example of each.
2. Calculate the total cost for a business with fixed costs of $5000 and variable
costs of $3 per unit for 1,000 units produced.
3. Explain the importance of understanding cost structures for a start-up
business.
3.3 Break-even Analysis
1. Define “contribution per unit” and explain its role in break-even analysis.
2. Given: Selling price = $8, Variable cost = $5, Fixed costs = $9,000.
a) Calculate the contribution per unit.
b) Calculate the break-even output.
1. Draw a fully labeled break-even chart for the above scenario.
2. Explain what is meant by the “margin of safety” and why it is important for a
business.
3. Discuss two limitations of break-even analysis for business decision-making.
3.4 Final Accounts
1. What is the purpose of a profit and loss (income) statement?
2. Explain the difference between gross profit and net profit.
3. Given: Sales = $50,000, COGS = $20,000, Expenses = $10,000. Calculate
gross profit and net profit.
4. What does a balance sheet show about a business?
3.5 Ratio Analysis
1. Define “current ratio” and “net profit margin.”
2. Calculate the current ratio and acid-test ratio from the following data: Current
assets = $15,000, Inventory = $3,000, Current liabilities = $10,000.
3. Explain one limitation of using ratios to assess business performance.
3.6 Budgets and Cash Flow
1. What is a cash flow forecast, and why is it important for a business?
2. Given: Inflows = $20,000, Outflows = $15,000. Calculate net cash flow and
closing balance if opening balance is $2,000.
3. Suggest two ways a business can improve its cash flow.
3.7 Investment Appraisal
1. Define “payback period” and “average rate of return (ARR).”
2. A business invests $12,000 and expects annual profits of $3,000. Calculate the
payback period and ARR over 4 years.
3. Discuss one advantage and one limitation of using net present value (NPV) for
investment decisions.
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Chapter 4: Marketing
4.1 The Role of Marketing
1. Explain the difference between market orientation and product orientation with
examples.
2. List two common marketing objectives for a business.
4.2 Marketing Planning
1. Define market segmentation and give two bases for segmenting a market.
2. Explain what is meant by targeting and positioning in marketing.
4.3 Sales Forecasting
● Describe one method of sales forecasting and one limitation of using it.
4.4 Market Research
1. Differentiate between primary and secondary market research, giving one
example of each.
2. Explain why both qualitative and quantitative research are useful when
launching a new product.
4.5 The Marketing Mix (4Ps/7Ps)
1. List and briefly describe the 4Ps of marketing.
2. Explain two pricing strategies and give an example of a business that might
use each.
3. What is meant by “above the line” and “below the line” promotion? Give one
example of each.
4. Describe two different channels of distribution (place).
4.6 Product
1. Draw and label the product life cycle. Describe what might happen to a firm’s
sales and profit at each stage.
2. What is the Boston Consulting Group (BCG) matrix? Place the following in the
matrix for Apple: iPhone, iPad, iPod, Apple Watch.
3. Why is branding important for a business?
4.7 Price
1. Define price skimming and penetration pricing. In what situations would each
be appropriate?
2. Explain price elasticity of demand and give an example of a product that is
price elastic and one that is price inelastic.
4.8 Promotion
1. Outline the AIDA model and its role in designing effective promotions.
2. Suggest two promotional methods suitable for a new local café.
4.9 Place
1. Give one advantage and one disadvantage of selling directly to consumers
through e-commerce.
2. Explain how changes in technology have affected distribution strategies.
4.10 International and Digital Marketing
1. Explain one challenge and one benefit of international marketing for a fast food
chain.
2. Discuss two ways digital marketing can help small businesses reach new
customers.
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Tip:
Practice answering each question using real business examples, draw diagrams where
appropriate, and always discuss both advantages and limitations in your longer
answers!