Identify why a business needs finance
Connect start-up, growth, replacement, technology and working-capital needs to the business decision they support.
Section 5 · Financial information and decisions
Cambridge IGCSE Business 0264, 2027–2029 syllabus, Topic 5. Use the supplied data and show calculation steps. Candidates are not assessed on constructing cash-flow forecasts or financial statements. Written practice is self-checked and does not certify exam readiness
Before you begin
- No previous finance study is assumed. Identify the time period, whether a figure is a stock or a flow, and the units before calculating or recommending.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Which is a common reason a business needs finance?
What you will learn
- Identify common reasons for finance
- Distinguish short- and long-term needs
- Explain why timing matters
Finance supports different needs
A new business may need start-up capital for premises, equipment, initial inventory and launch costs. An existing business may need finance to expand, replace a non-current asset, invest in technology or fund day-to-day working capital.
The purpose affects the amount and timing. A short cash shortage due next month differs from a long-term investment expected to benefit the business for years.
Match duration to purpose
Short-term finance can meet temporary cash needs; long-term finance can fund assets or expansion whose benefits accrue over time. A mismatch can create repayment pressure before the investment brings returns.
Finance does not make a project worthwhile by itself. A business should estimate total cost, expected benefit, risk and its ability to meet repayments or other obligations.
Pause and explain
Why can a long-lived asset call for a different finance period from a short cash gap?
Worked example
A bakery has enough orders to expand but needs a larger oven and more stock. Identify two finance needs and distinguish their likely time horizons.
Show the worked solution
- The oven is a non-current asset that supports output over several years.
- Additional stock and wages before customer receipts create a working-capital need.
- The two needs have different useful lives and cash timing.
Answer The oven is a longer-term investment; extra stock and operating cash may be a shorter-term working-capital need. The bakery should match finance duration to each use and check expected demand before committing.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A start-up needs $18,000 for equipment and $3,000 to pay initial bills while customers begin paying. Separate the purposes and explain one planning issue.
Give me a hint
The equipment lasts beyond the opening period; bills arise before cash receipts.
Compare my reasoning
- Classify the equipment as a non-current asset purchase.
- The bills create a short-term working-capital requirement.
- Compare the length of each need with repayment timing.
The $18,000 funds equipment for longer-term use; the $3,000 covers an initial working-capital gap. The business should avoid repayment dates that arrive before expected customer receipts, and test whether its sales assumptions are realistic.
Look for these in your work
- Two needs separated
- Time horizons explained
- One risk considered
A shop plans to replace an unreliable refrigeration unit. Explain why finance may still be needed when the replacement does not increase sales capacity.
Give me a hint
Replacement protects existing operations as well as enabling growth.
Compare my reasoning
- The old unit may fail or cause losses.
- A replacement may protect stock and service continuity.
- Compare purchase cost with repair and disruption risks.
Finance may be needed to replace a non-current asset even without expansion. A reliable unit can protect inventory and keep the shop operating; the owner should compare replacement cost with repair, energy and failure risks.
Look for these in your work
- Replacement need identified
- Operational reason explained
- Comparison suggested
A company wants to install a new ordering system and also clear a temporary two-week cash shortfall. Explain why one finance source may not suit both uses.
Give me a hint
Compare useful life and repayment horizon for the two needs.
Compare my reasoning
- The system is a longer-term technology investment.
- The cash shortfall is temporary and has a short timing horizon.
- Compare cost, availability and repayment dates separately.
The system may produce benefits over several years, while the cash shortage may disappear when receipts arrive. The company should compare finance duration, total cost and repayments for each purpose rather than assume one source is suitable for both.
Look for these in your work
- Needs separated
- Time horizon applied
- Cost and repayment checked
Common mistakes
- Treating every finance need as expansion
- Using long-term finance for a brief cash timing gap without comparing cost
- Assuming finance guarantees project success
What can you explain now?
Which is a common reason a business needs finance?
Compare with the explanation
Replacing machinery
Replacement of non-current assets is one listed need.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
How can a business's reason for needing finance affect the finance period it considers?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.