The Need for Finance (AQA A Level Business): Revision Note

Why businesses need finance

• All businesses need finance to get started, allow them to grow and fund their continuing activity

  • Finance may be needed for capital expenditure, which is spending on fixed assets such as equipment, buildings, IT equipment and vehicles

  • Similarly, finance is required for operating expenditure, which is spending on raw materials or day-to-day expenses, such as wages or utilities

Why business finance is needed

Start-up finance

• A new business needs start-up finance to pay for fixed assets and current assets such as inventory before it can begin trading

• The amount of start-up finance a business needs is identified in the business plan

  • Owners often invest their own capital into a new business

  • Some small new business owners obtain a start-up loan to cover initial costs

Finance for growth

• As a business grows, it may need more finance to purchase capital equipment

  • It may require more machinery, buildings, IT infrastructure or vehicles, which help the business to increase output

• If a business wants to grow by developing new products, large amounts may need to be invested in research and development (R&D)

  • E.g. Apple's annual R&D expenses for 2023 were $29.915bn, a 13.96% increase from 2022, to invest heavily in artificial intelligence (AI) and product innovation

Working capital

• Finance is required for working capital, which is spending on raw materials, wages or utilities

• Having a steady flow of working capital is essential to keep the business operational

  • Without working capital, the business would be unable to cover its day-to-day expenses

  • It may suffer cash-flow problems, which could lead to business failure

The need for finance at Innocent Drinks