Name: Amy Woodhouse

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 Unit Specification: Unit 3 – Personal and Business Finance
Method of assessment

Externally marked exam (80 marks – 2 hours)

Unit in brief

Learners study the purpose and importance of personal and business finance. They
will develop the skills and knowledge needed to understand, analyse and prepare
financial information.

Unit introduction

This unit includes aspects of both personal and business finance. Personal finance
involves the understanding of why money is important and how managing your
money can help prevent future financial difficulties. It is vital you understand the
financial decisions you will need to take throughout your life and how risk can affect
you and your choices. This unit will also give you an insight into where you can get
financial advice and support.

The business finance aspects of the unit introduce you to accounting terminology,
the purpose and importance of business accounts and the different sources of
finance available to businesses. Planning tools, such as cash flow forecasts and
break-even, will be prepared and analysed. Measuring the financial performance of a
business will require you to prepare and analyse statements of comprehensive
income and statements of financial position.

This unit will provide a foundation for a number of other finance and business units
and will help you to analyse profitability, liquidity and business efficiency. It will give
you the knowledge and understanding to manage your personal finances and will
give you a background to business finance and accounting as you progress to
employment or further training.

Summary of assessment

This unit is assessed by a written examination set by Pearson. The examination will
be two hours in length. The number of marks for the examination is 80. (Section A
contains questions on the personal finance unit content and approximately one-third

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of the marks, and Section B contains questions on the business finance unit content
and approximately two-thirds of the marks).

Assessment outcomes

AO1 Demonstrate knowledge and understanding of business and personal finance

principles, concepts, key terms, functions and theories. Command words: describe,
explain, give, identify, outline Marks: ranges from 1 to 4 marks.

AO2 Apply knowledge and understanding of financial issues and accounting

processes to real-life business and personal scenarios Command words: analyse,
assess, calculate, describe, discuss, evaluate, explain Marks: ranges from 2 to 12
marks.

AO3 Analyses business and personal financial information and data, demonstrating
the ability to interpret the potential impact and outcome in context Command words:
analyse, assess, discuss, evaluate Marks: ranges from 6 to 12 marks.

AO4 Evaluate how financial information and data can be used, and interrelate, in
order to justify conclusions related to business and personal finance Command
words: analyse, assess, discuss, evaluate Marks: ranges from 6 to 12 marks.

Glossary

Sources of Finance =The financing of a business is one of the fundamental areas

for the successful running of a business. Financing can happen at any stage of a
business’s life. It can be when the business first starts or when it wants to expand
and grow.

Short term – paid back within one year

Long term – paid back over a period of time greater than one year

Internal sources - of finance come from within the business. This is the finance or
capital which is generated internally by the business.

external sources - of finance which are externally sourced from banks or financial
institutions, such as loans.

credit limit - the maximum amount of credit available to the business.

credit period - the length of time the business has to pay what is owed, usually 30,
60 or 90 days

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frequency of payment - how often payment is required, usually monthly

method of payment - the way in which the business makes payment

retrospective discount - a discount given when the business has purchased a

certain amount of stock or raw materials.

Learning Outcome D - Select and Evaluate Different Sources of

Business Finance

Activity 1 – Internal Sources of Finance

As we go through each source of internal finance, take down what that source of
finance is and, in the table, write the advantages and disadvantages of using that
source of finance.

Internal source Explain the source Advantages Disadvantages

of finance
Retained Profit
When a business No interest Amount available
makes a profit it can charges may be limited
decide whether to
take that money out Available Could cause
of the business as a immediately shareholder
salary or a dividend dissatisfaction as
similarly they can Avoids debt dividend payment
decide to reinvest it would be reduced
back into the No loss of
business to expand ownership Once used it
or buy new cannot be used for
equipment etc. other purposes

for example amazon

builds a new building
everytime they make
a big profit

Net Current Net current assets Quick way of Short credit terms
Assets are current assets raising money can ruin
minus current relationships
liabilities. If you have Encourages the with customers

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 positive net current business to
assets then this can manage its cash Holding less stock
be used by the flow could impact
business to fund day availability
to day expenses.
May have to set
lower prices to sell
through stock
quicker

Sale of Assets A business can sell Good way of May not receive
assets that they have raising funds full value of
in order to receive a from assets no the asset if a quick
cash injection. longer needed sale is needed

For example the No interest If the asset is

business could have charged needed then
land, property or costs could
machinery that it increase to lease
could sell and then Reduces capital a
use that cash to tied up in similar asset back
invest in something useless assets
else that may be
more useful to the
business.

Activity 2 – Internal Source Scenario

Ross has decided to buy a van at a cost of £18,000. He has decided to use an
internal source of finance to fund this purchase. His business has made £36,000 in
profit this year.

Evaluate whether using retained profits would be a good source of finance for
his business.

it works well because he will still have 50% of profit left over, there won't be any
interest charges however if there is an emergency he will no longer have that
emergency fund.

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 Activity 3 – Knowledge Check Internal Sources of Finance
Outline two advantages of using retained profits as a source of finance

Explain what retained profits are

1. No interest charges
2. Available immediately

Suggest two disadvantages of using net current assets as a source of finance

1. Short credit terms can ruin relationships with customers

2. Holding less stock could impact availability

Explain a benefit of selling assets to finance a business

Good way of raising funds from assets no longer needed

Describe how net current assets can be used as a source of finance

If you have positive net current assets then this can be used by the business to fund
day to day expenses

Activity 4 - External Sources of Finance

From research or knowledge of external sources of finance complete with as many
external sources as you can.

External sources of finance are found outside the business, e.g. from creditors or
banks.

● preferred stock
● debentures,
● term loans,
● venture capital
● leasing
● hire purchase
● trade credit
● bank overdraft
● Owner’s capital
● Crowdfunding
● Mortgages
● Debt factoring
● Grants

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 ● Donations
● Peer to peer lending
● Invoice discounting

Activity 5 - External Sources

As we go through the types of external sources of finance fill out the description of
each one along with the advantages and disadvantages of using that source of
finance.

Owner’s capital

Description of source of finance:

This source of external finance is from the owner’s personal finances and is used to finance the
business.
from their savings

Advantages Disadvantages
No interest payments Limited amount available
No repayment schedule Personal finances are at risk
No loss of ownership Could cause friction between owners if
all are not able to contribute the same
amount

Loans

Description of source of finance:

A bank loan is money lent to an individual or business that is paid off with interest over an agreed
period. Usually this rate of interest is fixed.

This means that the business knows in advance what the cost of borrowing will be and what
monthly repayments will be required. This allows the business to manage their cash flow.

The bank may require the business to secure its assets against the loan. This means that if the
business is unable to repay the loan, the bank can demand the sale of the assets to raise money to
pay back the loan.
Advantages Disadvantages
Easy to budget as repayments are Interest charged
pre-arranged

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No loss of ownership Usually secured against an asset that
could be seized if loan is not repaid
Show financial statements to banks to
secure the loan

Crowdfunding

Description of source of finance:

Crowdfunding involves many people investing small amounts of money in a

business, usually online. Commonly used crowdfunding websites include
Crowdfunder, GoFundMe and Kickstarter.

It provides opportunities for individuals to start up a business even if they don’t

have access to other sources of funding.

It can be difficult to reach the funding target. Statistics from crowdfunding websites
indicate that less than 33 percent of businesses achieve their funding target.

Advantages Disadvantages
No interest paid Partial loss of ownership
Finance is received from a number of May not reach your crowdfunding target
investors as interest in the business may not be
there
Gauges people's interest in the Someone could steal your idea from the
business crowdfunding

Activity 6 – Key Questions

Complete the questions below from memory. If you don’t know the answer look it up
in your booklet or via internet research and put your answer in a different colour.

Explain what a loan is

A sum of money that’s borrowed from the bank

an amount of money that is borrowed, often from a bank, and has to be paid back,
usually together with an extra amount of money that you have to pay as a charge for
borrowing

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Compare using owner’s capital as a source of finance with acquiring a loan

owners capital is your own money/savings so you can use it immediately whereas
with a loan isn't immediate. owners capital is spending your money at your own risk

Discuss crowdfunding as a source of finance

Crowdfunding brings entrepreneurs through social media and crowdfunding websites

to bring investors together

Crowdfunding is the use of small amounts of capital from a large number of

individuals to finance a new business venture. Crowdfunding makes use of the easy
accessibility of vast networks of people through social media and crowdfunding
websites to bring investors and entrepreneurs together, with the potential to increase
entrepreneurship by expanding the pool of investors beyond the traditional circle of
owners, relatives, and venture capitalists.

Activity 7 - External Sources Continued

Mortgages

Description of source of finance:

A mortgage is a long term source of finance. It is a sum of money borrowed from

the bank that is secured against a property and paid back in instalments, usually
over a long period of time I.e. 25 or 30 years.

Advantages Disadvantages
Large amounts of finance can be Interest charged on amount borrowed
acquired and then repaid over a long
period of time
No loss of ownership or control Secured against asset that could be
seized
Not suitable as a short term source of
finance

Venture capital

Description of source of finance:

Venture capital is money invested by an individual or group that is willing to take

the risk of funding a new business in exchange for an agreed share of the profits.

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The venture capitalist will want a return on their investment as well as input into
how the business is run.

Venture capital is money that investors provide to a company that is starting up or

expanding. Venture capital is usually used when there is an element of risk with
the business.

Advantages Disadvantages
Finance is made available along with Loss of ownership and control
advice and mentoring
Finance may be easier to obtain as Conflicts may occur over the direction of
venture capitalists are usually high risk the business
high reward people

Debt factoring

Description of source of finance:

Debt factoring involves a business selling their invoices to a third party at a discounted price in
order to bypass the hefty waiting times which are associated with invoice payments.

This means they receive the money they are owed quickly however it comes at a cost as they get a
discounted amount from the debt factoring company.

Advantages Disadvantages
Improves the businesses cash flow Only receive a percentage of the
amount the business is owed
Reduces risk of default on payments Can alienate customers

Activity 8 – Advantages & Disadvantages

These advantages and disadvantages match with either a mortgage, venture capital
or debt factoring.

1. Improves the businesses cash flow - debt factoring

2. Loss of ownership and control - venture capital

3. Reduces risk of default on payments - debt factoring

4. Interest charged on amount borrowed - mortgages

5. Conflict may occur over the direction of the business - venture capital

6. Large amounts of finance can be acquired - mortgages

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 7. Only receive a percentage of the amount the business is owed - debt factoring

8. Secured against asset that could be seized - mortgages

9. Finance is made available along with advice and mentoring -venture capital

10. Not a Suitable short-term form of finance - mortgages

Activity 9 - External Sources Continued

Hire purchase

Description of source of finance:

Hire purchase is used to purchase an asset, such as a delivery van or piece of
equipment.

Advantages Disadvantages
Regular payments are good for Likely to cost more than buying the
budgeting assets outright
Spreads out the cost of an asset Only suitable for lower cost items such
as vehicles not land or buildings
Avoids paying a large lump sum

Leasing

Description of source of finance:

Leasing is a way of renting an asset that the business requires, such as a coffee
machine.

Monthly payments are made, and the leasing company is responsible for the
provision and upkeep of the leased item.

Unlike hire purchase the item is not owned at the end of the payments by the
business.

Advantages Disadvantages
Maintenance and repairs are the Likely to cost more than buying outright
responsibility of the supplier
Spreads the cost of the asset rather Never actually own the asset so the
than paying a lump sum payments are ongoing

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Trade credit

Description of source of finance:

Trade credit must be agreed with a supplier and forms a credit agreement with
them. This source of finance allows a business to obtain raw materials and stock
but pay for them later.

Advantages Disadvantages
Helps with cash flows due to delayed Lose discounts for paying cash
payments
No loss of ownership and control Short term source of finance

Activity 10 – Hire Purchase, Leasing, Trade Credit Fill in the Blank

Hire purchase is used to purchase an asset, such as a delivery van or piece of equipment.

A deposit is paid and the remaining amount for the asset is paid in monthly instalments over

a set period of time. The business does not own the items until all payments are made. An

advantage of this method is that the business makes regular payments which is good for

budgeting, however it is only suitable for lower cost items.

This source of finance is when you rent an asset that the business requires, such as a coffee

machine. Unlike hire purchase the item is not owned at the end of the payments by the

business. One advantage of leasing is that all maintenance and repairs are the responsibility

of the supplier. However, a disadvantage of this method is that it is more expensive than

buying the item outright.

This source of finance allows a business to obtain raw materials and stock but pay for them

at a later date. This method is called trade. The business may lose discounts for paying in

cash; this is a disadvantage for the business. Despite this it may improve their cash flow.

One thing that the business does not lose from using this source of finance is ownership and

control. This method is mainly used as a short term source of finance.

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 Activity 11 – External Sources Continued

Grants

Description of source of finance:

A grant is a fixed amount of money usually awarded by the government, EU

(European Union) or charitable organisations.

Advantages Disadvantages
Does not need to be repaid Have to meet certain conditions
No interest payments Takes a long time to apply
No loss of ownership or control
Donations

Description of source of finance:

source of finance for a non profit organisation such as a charity or social enterprise.

Donations are relied upon for the continual running and day to day upkeep of such
organisations .

Advantages Disadvantages
No need to repay Not reliable
No interest charged Usually received in small amounts
No loss of ownership or control

Peer to Peer Lending

Description of source of finance:

Peer-to-peer lending (P2P) is a way for people to lend money to individuals or businesses.

The lender lends their money to an organisation or individual. In return the lender receives
interest on top of the amount lent out.

Advantages Disadvantages
Interest rates can be lower than a Amount available to borrow may be
traditional bank limited
Easier to budget as repayments are at a Short term source
fixed rate

Invoice discounting

Description of source of finance:

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invoice discounting is a form of short-term borrowing against your outstanding invoices. It
is usually used to help improve a company’s working capital and cash flow position.

Advantages Disadvantages
No need to repay Often only available if purchases are
paid in cash
No interest charged Negatively impacts cash flow
Reduces costs to the business

Activity 12 – Sources of Finance Leaflet

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 Activity 13 – Sources Scenario 1
Holly has just completed a business qualification and has decided to set up a
small business buying and selling limited edition trainers. She knows that
there is a wide range of finance sources available to her but finds it very
complicated. She has £750 saved up in her bank account but has come to you
for advice on which 3 sources of finance you would recommend.

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 1. Trade credit is useful as she can obtain raw materials and stock but pay for
them later.

2. Venture capital is money invested by an individual or group that is willing to

take the risk of funding a new business in exchange for an agreed share of
the profits. This works well as she has the knowledge but not the experience.

3. A bank loan is money lent to an individual or business that is paid off with
interest over an agreed period.This means that the business knows in
advance what the cost of borrowing will be and what monthly repayments will
be required. This allows the business to manage their cash flow.

Activity 14 – Sources Scenario 2

One year ago, Aman started a high street premium burger restaurant which
allows customers to customise their burger to their exact specification. It has
been incredibly successful, and Aman is now looking to open a second
restaurant in a nearby town. However, he is unsure which is the best way to
source finance for this expansion. He is considering using retained profits,
venture capital or crowdfunding.

1. venture capital - extra support but you will not receive all the profit

2. retained profits - he can decide how to spend his profit but hasn’t got any
support

3. crowdfunding - bendicail in the long run but as he is already successful it

won't benefit him as effectively

Activity 15 – Sources Scenario 3

Alister is currently running a successful business but needs to purchase 5
new company cars for his sales team. He currently has enough money in
retained profit in the business to buy the cars outright but is wanting to
investigate getting a bank loan or leasing the vehicles.

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 1. bank loan - it will financially support him to buy them outright but he will have
to pay interest

2. retained profit - is beneficial because he already has the money available but
once this is used it cannot be used for other purchases

3. leasing the vehicles -it spreads the cost overtime but he wants to buy them so
it isn't a good option for him

Activity 16 – Learning Outcome D Kahoot Quiz

Test your knowledge of Learning Outcome D of Unit 3: Personal and Business
Finance by clicking this link: Play Kahoot

Once you have completed the quiz, answer the questions below to assess your
strengths and areas of development.

What did you score on the Kahoot quiz?

What areas of Learning Outcome D can you identify as your strengths after
playing the quiz?

What areas of Learning Outcome D can you identify as your development

areas after playing the quiz?

How do you plan to develop the areas you have identified to increase your
knowledge and understanding of these topics?

Activity 20 – Personal and Business Finance Learning Outcome D

Unit 3: Personal and Business Finance Checklist

Learning Outcome D: Select and Evaluate Different Sources of

Business Finance
Topic Your explanation of the Exam
terminology ready?

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D1 – Sources of Finance Not yet
Internal Sources

Retained profit When a business makes a profit it

can
decide whether to take that money
out of the business as a salary or a
dividend
similarly they can decide to reinvest it
back into the business to expand or
buy new equipment etc.

for example amazon builds a new

building everytime they make a big
profit

Net current assets Net current assets are current assets

minus current liabilities. If you have
positive net current assets then this
can be used by the business to fund
day to day expenses.

Sale of assets A business can sell assets that they

have in order to receive a cash
injection.

For example the business could have

land, property or machinery that it
could sell and then use that cash to
invest in something else that may be
more useful to the business

External Sources

Owner’s capital This source of external finance is

from the owner’s personal finances
and is used to finance the business.
from their savings

Loans A bank loan is money lent to an

individual or business that is paid off
with interest over an agreed period.
Usually this rate of interest is fixed.
Crowd-funding Crowdfunding involves many people
investing small amounts of money in
a business, usually online.
Commonly used crowdfunding

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 websites include Crowdfunder,
GoFundMe and Kickstarter.

Mortgages A mortgage is a long term source of

finance. It is a sum of money
borrowed from the bank that is
secured against a property and paid
back in instalments, usually over a
long period of time I.e. 25 or 30
years.

Venture capital Venture capital is money invested by

an individual or group that is willing to
take the risk of funding a new
business in exchange for an agreed
share of the profits.
Debt factoring Debt factoring involves a business
selling their invoices to a third party
at a discounted price in order to
bypass the hefty waiting times which
are associated with invoice payments
Hire purchase Hire purchase is used to purchase an
asset, such as a delivery van or piece
of equipment.

Leasing Leasing is a way of renting an asset

that the business requires, such as a
coffee machine.

Trade credit Trade credit must be agreed with a

supplier and forms a credit
agreement with them. This source of
finance allows a business to obtain
raw materials and stock but pay for
them later
Grants A grant is a fixed amount of money
usually awarded by the government,
EU (European Union) or charitable
organisations.

Donations Donations are relied upon for the

continual running and day to day
upkeep of such organisations .
Peer to peer lending Peer-to-peer lending is a way for
people to lend money to individuals
or businesses.

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 The lender lends their money to an
organisation or individual. In return
the lender receives interest on top of
the amount lent out.

Invoice discounting Invoice discounting is a form of

short-term borrowing against your
outstanding invoices. It is usually
used to help improve a company’s
working capital and cash flow
position.

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