| Stage | Why finance is needed | Examples of spending |
|---|---|---|
| Start-up | A new business must buy assets and pay costs before it earns any revenue | Premises, equipment, initial inventory, licences, launch promotion, wages before sales begin |
| Growth | Expansion requires investment ahead of the extra revenue it will generate | New outlets or factories, machinery, research and development, entering new markets, takeovers |
| Survival | Day-to-day costs must be paid even when sales are slow, seasonal or when customers pay late | Wages, rent, supplier bills, loan interest during a recession or a temporary cash shortage |
The term of finance should match its use. Buying a machine that will last ten years with an overdraft that the bank can withdraw at any time is risky; paying weekly wages with a 20-year loan is unnecessary and expensive. This matching principle links directly to the choice of source (Topic 5.2).
A business can be profitable but short of cash, or cash-rich but making losses. This happens because revenue and costs are recorded when a sale or purchase is made, not when cash actually changes hands.
| Profitable but short of cash when… | Cash-rich but loss-making when… |
|---|---|
| Goods are sold on credit — profit is recorded but customers have not yet paid | A business has just received a large loan or new share capital |
| Profitable but short of cash when… | Cash-rich but loss-making when… |
| Large amounts of cash are spent on inventory or non-current assets | Non-current assets have been sold for cash |
| Loans are being repaid (repayment is not a cost in the profit calculation) | Customers pay in advance (deposits, subscriptions) but costs come later |
| The business is growing rapidly and must fund ever more inventory and receivables ('overtrading') | Suppliers have given long credit terms, so bills are not yet paid |
A furniture maker sells a dining set for ₹90 000 in March, on 60 days' credit. The materials and labour cost ₹60 000, paid in March.
Profit recorded in March = 90 000 − 60 000 = ₹30 000 profit
Cash flow in March = 0 received − 60 000 paid = ₹60 000 cash outflow
The sale is profitable, yet in March the business is ₹60 000 worse off in cash — it must have finance to survive until May.
Both matter: profit is essential in the long run (owners need a return), but cash is essential in the short run — a business cannot pay wages or suppliers with profit. Far more businesses fail from running out of cash than from making losses.
| Process | Applies to | Outcome |
|---|---|---|
| Bankruptcy | Individuals — sole traders, partners | Personal assets sold to pay debts; individual may be restricted from running a business |
| Administration | Companies (insolvent) | Administrator tries to save the business — restructuring, finding a buyer; may avoid closure |
| Liquidation | Companies | Assets sold, creditors paid in order of priority, company closed permanently |