IB Diploma Programme Business Management HL, Unit 3 Finance and accounts (first assessment 2024). This topic covers syllabus sections 3.1–3.9 in full: the role of finance and its sources, costs and revenues, final accounts, profitability and liquidity ratio analysis, debt/equity ratio analysis (HL only), cash flow, investment appraisal, and budgets (HL only). The worked accounts below belong to the shared repair business in its second year as a company, so every figure cross-checks.

Must-know for Unit 3:

Finance (3.1) exists to fund CAPITAL EXPENDITURE (non-current assets: workshops, machines — spent once, used for years) and REVENUE EXPENDITURE (day-to-day: wages, parts, rent — spent to keep trading). The two must be matched to the right source: funding a workshop with an overdraft, or wages with a long loan, is a classic Paper 2 error.

Sources (3.2) divide first by origin. INTERNAL sources need no outsider: retained profit 留存利润 (free and flexible, but limited by what was earned), the sale of unwanted assets, and the owners' own savings. EXTERNAL sources bring outside money: share capital 股本 (permanent, no repayment, but dilutes ownership — available to companies), long-term LOAN CAPITAL (large sums with interest and often collateral), OVERDRAFTS (small, flexible, expensive per pound, repayable on demand), trade credit 商业信贷 (suppliers' 30–60 days, interest-free but risks a poor credit reputation), LEASING and hire purchase (use assets without buying them), CROWDFUNDING (many small sums, often pre-sales), MICROFINANCE providers (small loans to those excluded from banks) and BUSINESS ANGELS (investors who also advise, for equity). The choice weighs cost, control, flexibility, risk, the time period, and the firm's gearing — a highly geared firm should prefer equity.

Worked example. The second workshop (cost 120 000) was funded half from retained profit and half from a five-year loan at 8%: the asset earns over years, so a long-term source fits; the parts bill (45 000 a month) rides on trade credit; a December wage squeeze uses the overdraft for eleven days.

Costs and revenues (3.3). A fixed cost 固定成本 does not vary with output (rent, salaries, depreciation, insurance); a VARIABLE cost does (parts, piece rates). DIRECT costs attach to a single product or department; INDIRECT costs (overheads) are shared. Revenue = price × quantity; the repair business bills 2 000 repairs a month at 25 on average, so 600 000 a year.

Final accounts (3.4). The INCOME STATEMENT (profit and loss) measures performance over a period: revenue 600 000, cost of sales 360 000, giving GROSS PROFIT 240 000; expenses 150 000, giving PROFIT FOR THE YEAR 90 000 (before interest and tax, in this simple form). The STATEMENT OF FINANCIAL POSITION (balance sheet 资产负债表) photographs the business on one day: NON-CURRENT ASSETS 320 000 (workshops and equipment at cost less accumulated depreciation); CURRENT ASSETS 80 000 (inventory 30 000, trade receivables 40 000, cash 10 000); CURRENT LIABILITIES 40 000 (payables 25 000, overdraft 5 000, short-term loan 10 000) — so working capital 营运资金, current assets minus current liabilities, is 40 000; NON-CURRENT LIABILITIES 160 000 (the five-year loan); EQUITY 200 000 — and the sheet always balances: $320\,000 + 80\,000 = 200\,000 + 160\,000 + 40\,000$.

Depreciation 折旧 spreads an asset's cost over its life. Straight-line: a 22 000 diagnostic machine with a 2 000 residual value over four years costs $(22\,000 - 2\,000)/4 = 5\,000$ a year — charged as an expense and deducted from the asset's book value. (The units-of-production method charges by usage instead: the same machine rated for 20 000 diagnoses at 1 per diagnosis.)

Ratios (3.5) read the two statements together. PROFITABILITY: gross profit margin $= 240\,000 / 600\,000 = 40\%$; profit margin $= 90\,000 / 600\,000 = 15\%$; return on capital employed (ROCE) $= 90\,000 / (320\,000 + 40\,000) = 25\%$ — compare ROCE with the 8% loan rate: the loan earns its keep. LIQUIDITY: the CURRENT ratio $= 80\,000 / 40\,000 = 2.0$ (a guideline band of 1.5–2); the ACID TEST drops inventory: $(80\,000 - 30\,000) / 40\,000 = 1.25$. Improving profitability: cost control, better buying, premium pricing, higher-margin services. Improving liquidity: sell inventory, collect receivables faster, delay payables, longer-term finance — each traded against profitability or supplier goodwill.

HL: the DEBT/EQUITY (gearing) ratio (3.6) $= 160\,000 / 200\,000 = 80\%$. High gearing magnifies returns to shareholders when ROCE exceeds the interest rate and magnifies losses when it does not; lenders read it as risk. A geared firm choosing finance should tilt to equity; income gearing (interest as a share of profit) is the stress test.

Cash flow (3.7) is NOT profit: profit is revenue matched to costs in the period; cash is the money actually moving. A profitable business fails if cash runs out (inventory and receivables absorb cash). Motives for holding cash: TRANSACTIONARY (day-to-day), PRECAUTIONARY (safety), SPECULATIVE (opportunities). The cash flow forecast 现金流量预测 tabulates opening cash, cash IN (sales receipts, capital) and cash OUT (payments) to give closing cash month by month — and is adjusted for expected changes, not just repeated. Cash-flow problems are treated by the improvement levers above, by an overdraft, or by emergency cost cuts.

Worked example. March opens with 12 000; receipts 42 000; payments 48 000 → closing 6 000. April opens with 6 000; receipts 44 000; payments 55 000 (quarterly insurance and the parts bill land together) → closing $-5\,000$: an overdraft is needed, and the forecast shows it two months early.

Investment appraisal 投资评估 (3.8) judges a capital project three ways. The third workshop costs 120 000 and is expected to add NET cash flow of 40 000 a year for four years. PAYBACK $= 120\,000 / 40\,000 = 3$ years — simple and risk-focused, blind to everything after payback. AVERAGE RATE OF RETURN: total returns $4 \times 40\,000 - 120\,000 = 40\,000$, so average annual profit $10\,000$ and ARR $= 10\,000 / 120\,000 = 8.3\%$ — comparable with the loan rate. NET PRESENT VALUE discounts at the cost of capital, 6%: the four payments are worth $37\,720 + 35\,600 + 33\,600 + 31\,680 = 138\,600$, so NPV $= +18\,600$ — positive, so the project adds value that the payback and ARR alone cannot see.

A budget 预算 (3.9, HL only) is a plan expressed in money for a period; FORECASTS predict what will happen, budgets commit to what should. A COST CENTRE accumulates its costs (each workshop), a PROFIT CENTRE its revenues and costs (each workshop plus its front desk). VARIANCE analysis compares actual with budget: a FAVOURABLE variance beats the budget, an ADVERSE one misses it; the skill is naming the cause (price or volume; efficiency or rate) before the remedy. Benefits: coordination, motivation, control, delegation; limitations: time, rigidity, gaming — budgets serve managers, not the reverse.

Worked example. Workshop 3 budgets 520 repairs at 25 (13 000) and delivers 560 at 24 (13 440): a favourable volume variance, an adverse price variance, and a favourable total — investigate the price cut that bought the volume before praising either.

• Capital vs revenue expenditure; internal vs external sources with each one's cost, control and risk; matching source to time period (3.1–3.2).
• Fixed/variable, direct/indirect costs; revenue; the income statement 600 000 → 360 000 → 240 000 → 90 000; the balance sheet balancing at 400 000; straight-line depreciation 5 000 (3.3–3.4).
• GPM 40%, profit margin 15%, ROCE 25% vs the 8% loan; current ratio 2.0, acid test 1.25; the improvement levers (3.5).
• Gearing 80% with its two-sided reading; equity vs debt choice (3.6 HL).
• Profit vs cash; the three motives; the March–April forecast with the $-5\,000$ April (3.7).
• Payback 3 yr, ARR 8.3%, NPV $+18\,600$ at 6% — what each can and cannot see (3.8).
• Budget vs forecast; cost and profit centres; favourable vs adverse variance with causes (3.9 HL).

Boundary notes: Paper 2 is the quantitative paper — every ratio, the depreciation, the forecast and all three appraisal methods above are examinable with a calculator; show the formula, the substitution and the answer with its sign. Paper 1 asks for sources of finance and cash-flow strategies evaluated in context. All worked numbers are original on the shared repair business.