What is the difference between internal and external sources of finance?

Internal sources come from within the business, such as the owner's capital, retained profit and selling assets; they avoid interest and outside control but are limited. External sources come from outside, such as a bank loan, an overdraft, share capital, crowdfunding and trade credit; they can raise larger amounts but often cost interest or give away control.

What is the difference between fixed and variable costs?

Fixed costs do not change with output, so they stay the same whether the business produces a lot or a little (for example rent, salaries and insurance). Variable costs change directly with output, rising as more is produced (for example raw materials and packaging). Total costs are fixed costs plus variable costs.

How do you calculate break-even output?

First work out the contribution per unit, which is the selling price minus the variable cost per unit. Then break-even output is the fixed costs divided by the contribution per unit. Below break-even the business makes a loss; above it the business makes a profit. The margin of safety is actual output minus break-even output.

Why can a profitable business still run out of cash?

Profit is revenue minus costs over a period, but cash flow is about the timing of money in and out right now. A business can be profitable over a year yet run short of cash in a month if customers pay late, it has tied up money in stock, or it has spent heavily on equipment. It can improve cash flow by getting customers to pay sooner, taking longer to pay suppliers, holding less stock or arranging an overdraft.

What is the difference between gross profit and net profit?

Gross profit is revenue minus the cost of sales (the direct cost of the goods sold), so it is the profit before overheads. Net profit is gross profit minus the other expenses (overheads such as rent, salaries and marketing), so it is the profit after all costs and the truer measure of success. The gross and net profit margins express these as percentages of revenue.

How should I revise the finance topic?

Learn the formulas until they are automatic: revenue equals price times quantity; total costs equal fixed plus variable; profit equals revenue minus total costs; contribution equals price minus variable cost; break-even equals fixed costs divided by contribution; net cash flow equals inflows minus outflows; and the gross and net profit margins. Practise calculation questions and always show your working, then be ready to interpret what the numbers mean and recommend action.

WalesBusiness

Finance: a complete overview for WJEC GCSE Business

A complete overview of the finance topic for WJEC GCSE Business, covering sources of finance, revenue, costs and profit, break-even analysis, cash flow, and financial statements and ratios, with the key formulas.

Generated by Claude Opus 4.814 min readWJEC GCSE Business - Key business functions: financeUpdated 2026-06-15

Reviewed by: AI editorial process; not yet individually human-reviewed

Jump to a section

What this covers
Sources of finance and the building blocks
Break-even and cash flow
Financial statements and ratios
Check your knowledge

What this covers

Finance is the key business function that raises and manages money. This overview ties the dot points together: sources of finance, revenue, costs and profit, break-even analysis, cash flow, and financial statements and ratios. Finance is the most calculation-heavy topic on the course, so the formulas below are the ones to learn cold, and every calculation question rewards clear working.

Sources of finance and the building blocks

A business funds itself from internal sources (owner's capital, retained profit, selling assets) or external sources (loans, overdrafts, share capital, crowdfunding, trade credit), and from short-term finance (for day-to-day needs) or long-term finance (for big items). The building blocks of every finance calculation are revenue (price times quantity), fixed costs (unchanged by output), variable costs (rising with output), total costs (fixed plus variable) and profit (revenue minus total costs).

Break-even and cash flow

Break-even is where total revenue equals total cost, found from contribution (price minus variable cost) and the formula fixed costs divided by contribution; the margin of safety is how far actual output is above break-even. Cash flow is the timing of money in and out: net cash flow is inflows minus outflows, and the closing balance is the opening balance plus net cash flow. The key idea is that cash flow is not profit: a profitable business can still run out of cash, and it can improve cash flow by speeding up money in, slowing money out, holding less stock or using an overdraft.

Financial statements and ratios

The income statement works down from revenue to gross profit (revenue minus cost of sales) to net profit (gross profit minus other expenses). Profitability ratios turn these into percentages: the gross profit margin and the net profit margin (each profit as a percentage of revenue). Comparing margins over time or against rivals shows whether profitability is improving or worsening and guides decisions to cut costs, raise prices or boost sales.

Finance is the function that raises and manages money in WJEC GCSE Business, and it is the most calculation-heavy topic. A business funds itself from internal sources (owner's capital, retained profit, selling assets) or external sources (loans, overdrafts, share capital, crowdfunding, trade credit), short-term or long-term. The building blocks are revenue (price times quantity), fixed costs (unchanged by output), variable costs (rising with output), total costs (fixed plus variable) and profit (revenue minus total costs). Break-even is where revenue equals total cost, found from contribution (price minus variable cost) and fixed costs divided by contribution; the margin of safety is actual output minus break-even output. Cash flow is the timing of money in and out: net cash flow is inflows minus outflows, and the closing balance is the opening balance plus net cash flow; crucially, cash flow is not the same as profit, so a profitable firm can still run out of cash. The income statement gives gross profit (revenue minus cost of sales) and net profit (gross profit minus expenses), and the gross and net profit margins express these as percentages of revenue to judge performance.

Check your knowledge

State one internal and one external source of finance. (2 marks)
What is the difference between fixed and variable costs? (2 marks)
How do you calculate profit? (1 mark)
How do you calculate break-even output? (2 marks)
What is the margin of safety? (2 marks)
How do you calculate net cash flow and the closing balance? (2 marks)
Why can a profitable business run out of cash? (2 marks)
What is the difference between gross profit and net profit? (2 marks)

Solutions

Q1: Internal: retained profit (or owner's capital, selling assets). External: a bank loan (or overdraft, share capital, crowdfunding, trade credit).
Q2: Fixed costs stay the same whatever the output (rent, salaries); variable costs rise and fall with output (raw materials).
Q3: Profit = total revenue - total costs.
Q4: Break-even output = fixed costs / contribution per unit, where contribution = selling price - variable cost per unit.
Q5: The amount by which actual output is above break-even output: margin of safety = actual output - break-even output. It shows how far sales could fall before a loss.
Q6: Net cash flow = inflows - outflows; closing balance = opening balance + net cash flow.
Q7: Because cash flow is about timing, not yearly profit: late-paying customers, money tied up in stock or heavy spending on equipment can leave a profitable firm short of cash in a month.
Q8: Gross profit = revenue - cost of sales (before overheads); net profit = gross profit - other expenses (after all costs).

Sources & how we know this

WJEC GCSE Business specification (Wales) — WJEC (2025)