Cambridge A Level Business 9609
Sources of finance and cash flow
Finance is classified two ways at once: internal or external, and short-term or long-term — and the rule that decides a question is to match the term of the finance to the life of what it is buying. A delivery van used for six years is funded by a loan or leasing, not by an overdraft; a temporary gap before customers pay is funded by an overdraft, not by selling shares.
The companion idea is the one examiners say candidates understand least: profit is not cash. A business can be profitable and still fail, because a sale made on two months’ credit is profit today and cash in sixty days, while wages are cash now. That is what a cash-flow forecast exists to expose, and it is why these two syllabus sections belong together.
Updated 15 September 2026
Internal sources
- Retained profit — profit kept in the business rather than distributed. No interest, no loss of control, no repayment; but it is only available to an established, profitable business, and shareholders lose dividends.
- Sale of assets — selling equipment or property the business no longer needs. Raises cash without debt; a sale-and-lease back keeps the asset in use but adds a rental cost. Once sold, it is gone.
- Working capital management — running down stock or collecting debts faster. Free, and fast; but too little stock risks lost sales, and pressing customers for payment risks losing them.
- Owner’s savings — for a sole trader or partnership, the most common start-up source. No interest and no dilution; the owner carries the risk personally.
External sources
| Source | Term | Trade-off |
|---|---|---|
| Bank overdraft | Short | Flexible and interest only on what is used; expensive, and repayable on demand. |
| Trade credit | Short | Free finance from suppliers; lost discounts and a damaged relationship if abused. |
| Debt factoring | Short | Cash for unpaid invoices immediately; the factor keeps a percentage. |
| Bank loan | Long | Predictable repayments, control kept; interest, and usually security over an asset. |
| Mortgage / debenture | Long | Large sums against property; a long commitment and a charge on the asset. |
| Share capital | Long | No repayment and no interest; ownership diluted and dividends expected. Only for companies. |
| Venture capital | Long | Funds and expertise for a high-risk business; a large equity stake and a say in decisions. |
| Leasing / hire purchase | Long | Use of an asset without buying it; total cost higher, and with leasing you never own it. |
| Government grant | Long | No repayment; conditional, competitive, and rarely enough on its own. |
Choosing a source
The factors, and the reason each matters — these are the analysis chains in an 8- or 12-mark answer:
- Purpose and term. Match the finance to the life of the asset. Funding a long-term asset from an overdraft is the classic error, because the overdraft can be called in.
- Amount. Small sums come from internal sources or trade credit; large ones need a loan or share issue.
- Legal structure. A sole trader cannot sell shares. Only a public limited company can sell them to the general public.
- Cost. Interest is a fixed cash outflow whatever profit does; dividends are expected but not contractual.
- Control. Share capital dilutes ownership; venture capital brings an investor into decisions; debt leaves control intact.
- Existing gearing and risk. A business already heavily borrowed will struggle to borrow more, and each additional loan raises the fixed commitment it must meet in a downturn.
- Speed and availability. A grant application takes months; an overdraft extension takes a phone call.
Cash flow: why profit is not cash
Profit is revenue minus costs over a period. Cash flow is money actually entering and leaving the bank account. They differ because of timing and because some items are one but not the other:
- A credit sale is revenue when the sale is made, and cash when the customer pays — often 30 or 60 days later.
- Buying a machine is a large cash outflow but not a cost in that period; only its depreciation is a cost, and depreciation never leaves the bank at all.
- Repaying the capital of a loan is cash out but not a cost; only the interest is.
The consequence is the sentence worth writing in any answer on the topic: a profitable business can run out of cash and fail — most often a fast-growing one, which must pay for stock and staff before its growing sales are collected. This is overtrading, and it is the standard case-study scenario.
The cash-flow forecast
A month-by-month projection of what will enter and leave the bank:
opening balance
+ total cash inflows
− total cash outflows
= closing balance (which becomes next month’s opening balance)
Net cash flow is inflows minus outflows for the month; the closing balance is the running total. A business can have positive net cash flow in a month and still be overdrawn, because the opening balance was negative — which is why questions ask for both.
Its uses: to see when finance will be needed and arrange it in advance, to support a loan application, to set targets, and to test decisions before making them. Its limits: it is a forecast built on estimated sales, a single unexpected event breaks it, and it says nothing about profitability.
Worked example
Worked example
A shop opens with $4 000 in the bank. Cash sales are $12 000 in January, $9 000 in February and $15 000 in March. It pays $8 000 for stock, $3 000 for wages and $2 000 for rent each month, plus a $6 000 shop fitting in February. Complete the forecast and advise the owner.
| $ | Jan | Feb | Mar |
|---|---|---|---|
| Opening balance | 4 000 | 3 000 | (7 000) |
| Inflows | 12 000 | 9 000 | 15 000 |
| Outflows | 13 000 | 19 000 | 13 000 |
| Net cash flow | (1 000) | (10 000) | 2 000 |
| Closing balance | 3 000 | (7 000) | (5 000) |
Brackets are the convention for a negative figure. February’s outflows are the usual $13 000 plus the $6 000 fitting; March returns to $13 000 and generates $2 000 of net cash flow — but the closing balance is still −$5 000, because the opening balance was −$7 000.
The advice, which is where the marks are: the business is not unprofitable — March’s trading is positive and the deficit comes from a one-off $6 000 asset purchase. So the fix is to match the finance to the asset: fund the shop fitting by leasing or a small loan spread over its useful life rather than from three months’ trading cash, and arrange an overdraft facility before February rather than after. Selling shares to cover $6 000 would be disproportionate.
Fixing a cash-flow problem
Every solution has a cost, and naming the cost is the evaluation:
| Action | Cost of it |
|---|---|
| Arrange or extend an overdraft | Interest, and it is repayable on demand. |
| Delay paying suppliers | Lost discounts, and supply withdrawn if repeated. |
| Chase customers / offer early-payment discounts | The discount reduces margin; pressure can lose customers. |
| Debt factoring | The factor keeps a slice of every invoice. |
| Cut or delay stock purchases | Lost sales if demand appears. |
| Sell or lease back an asset | The asset or its future use is gone. |
| Delay expansion | Competitors may take the opportunity. |
A top-band judgement distinguishes a timing problem — solvable with short-term finance — from a trading problem, where the business is losing money and borrowing only postpones it. Say which one the case shows. The break-even page covers the profitability side of that judgement.
Common mistakes
1.Profit and cash flow treated as the same
They differ by timing, by capital spending and by loan repayments. Saying so explicitly is usually a knowledge mark in itself.
2.Suggesting a share issue for a sole trader
Only companies can issue shares, and only a public limited company can sell them to the general public. Check the legal structure in the case before recommending.
3.Long-term asset funded by overdraft
Match the term of the finance to the life of the asset. An overdraft is repayable on demand — the wrong instrument for a five-year machine.
4.Closing balance confused with net cash flow
Net cash flow is that month alone; the closing balance is the running total. A positive month can still end overdrawn.
5.Listing solutions without their costs
“Get an overdraft” is a point, not an argument. Interest, security and repayable-on-demand are what turn it into analysis and then evaluation.
Common questions
What is the difference between internal and external sources of finance?
Internal sources come from within the business — retained profit, selling assets, tighter working capital, the owner’s own savings. External sources come from outside it — overdrafts, loans, share capital, trade credit, leasing, grants.
Why can a profitable business run out of cash?
Because profit and cash arrive at different times. Sales made on credit are profit now and cash later, while wages, stock and rent are cash now; buying equipment and repaying loan capital take cash without being costs. A fast-growing business pays for growth before it collects the revenue — overtrading.
How do you calculate net cash flow and the closing balance?
Net cash flow = total inflows − total outflows for the month. Closing balance = opening balance + net cash flow, and it becomes the next month’s opening balance.
Which source of finance should a business choose?
Whichever matches the purpose, the amount, the legal structure, the cost, the owners’ willingness to give up control and the debt the business already carries. The general rule is to fund long-term assets with long-term finance and short-term gaps with short-term finance.
Practise sources of finance and cash flow against real mark schemes
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