IB Diploma Programme Business Management SL, Unit 3 Finance and accounts (first assessment 2024). This topic covers the SL content of syllabus sections 3.1-3.8: the role of finance and its sources, costs and revenues, final accounts, profitability and liquidity ratio analysis, cash flow, and investment appraisal — the debt/equity ratio analysis (3.6) and budgets (3.9) sections are HL only and are left out. 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 existing borrowing — a heavily indebted 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.

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.

• 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).
• 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).

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; the research project often takes a finance issue through the lens of sustainability or ethics. All worked numbers are original on the shared repair business.