Planning a Business and Raising Finance
Unit 2: Managing Business Activities
Planning a Business and Raising Finance
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A business plan is a written document setting out what the business will sell, to whom, how it will operate and what it expects to earn and spend.
A business plan is a formal written document that describes a business idea and the evidence behind it. There is no single legal format, but a plan a lender or investor will read covers the same ground every time, because each section answers a question someone putting money in will ask.
Yusra Foods, a dried-fruit snack manufacturer, wrote each of these before it opened. The financial section set the number the rest of this chapter turns on: a funding requirement of $240,000 for premises and a first production line.
Real Example: Grab began as a business plan written for a university competition, setting out a taxi-booking idea for South-East Asian cities and the research behind it. The plan named the market before the company existed.
Exam Matters: A Define (2 marks, WBS12 Appendix 6) on a business plan needs the document AND its purpose: a written statement of objectives, strategy and financial forecasts, used to guide the business and to obtain finance. Naming only the document is half a definition.
Inside the business, a plan forces decisions to be thought through before money is committed, and gives targets that later performance can be measured against.
The specification asks for the relevance and uses of a business plan. It has two audiences, and the first is the owner. Writing the plan is the first time the idea has to survive contact with numbers.
The discipline is the point. An owner who has costed the operation knows which assumption the whole thing depends on, and watches that one. Yusra Foods knew its plan broke if the production line cost more than budgeted, so the equipment quote was fixed before the premises were signed.
A plan also gives a benchmark. Without one, a disappointing month is just a feeling; against a forecast it is a number, and the owner can ask which assumption was wrong rather than whether things feel slow.
Real Example: Careem's founders planned city by city, setting targets for each market before entering it, so a city that missed its targets could be identified as a problem rather than absorbed into a general sense that growth was slower than hoped.
Exam Matters: An Explain (4 marks, WBS12 Appendix 6) asks for a reason developed into a consequence. "It sets targets" is the reason; "so a shortfall is identified in month two rather than month eight" is the development that completes it.
The plan's second audience is outside the business: a lender or investor who has not had the idea and must decide from the document whether to risk money on it.
The second of the two uses is external. A bank deciding on Yusra Foods' loan and an investor deciding on its shares have the same problem: they know nothing about the business that the plan does not tell them.
What each looks for differs, and the difference is worth learning because it explains why one plan can succeed with one and fail with the other.
Yusra Foods took the same plan to both. The bank lent $90,000 against the production line it could repossess; the business angel put in $60,000 because the market section showed a market far larger than the first line could serve.
Real Example: Jollibee grew from a single ice cream parlour in Manila into a listed international chain, financed at each stage by outsiders who had to be shown the scale of the opportunity before they would fund the next step.
Exam Matters: An Analyse (6 marks, WBS12 Appendix 6) wants a chain of reasoning applied to the business in the source. Naming the reader, then what that reader needs from the plan, then the decision it leads to, is the chain the command word asks for.
A plan is built from assumptions about an unknown future, so it dates quickly and misleads if it is read as a forecast of what will happen rather than what is expected.
The specification asks for relevance, and relevance has two sides. A plan that is never revisited becomes a description of a business that no longer exists, and an evaluation question wants that limitation as clearly as it wants the benefits.
None of this makes planning pointless — it makes a plan a working document. Yusra Foods rewrote its forecasts once the first year's trading gave it real figures to replace the estimates, which is the response the limitation calls for.
Real Example: Shopify began as a plan for an online snowboard shop and became a platform for other people's shops, because the founders revised the plan around what they learned building the first one rather than defending it.
Exam Matters: An Evaluate (20 marks, WBS12 Appendix 6) requires a supported judgement, which means the answer must come down somewhere and say what the judgement depends on. A balanced list of benefits and limitations with no conclusion has not evaluated anything.
Owner's capital is money the owner puts in from personal savings: the first finance almost every business has, and the finance every other provider looks for before committing.
The specification opens internal finance with owner's capital: personal savings — money the owner already has and chooses to put into the business. It comes first in the spec and first in practice, because a start-up has no profits to retain and no assets to sell.
The founder of Yusra Foods put in $60,000 of savings, a quarter of the $240,000 needed. That figure did more than fund the premises: it was the reason the bank and the angel took the rest of the plan seriously.
That last point is what outside providers read it as. An owner who has put in savings loses personally if the business fails, so the commitment is visible — which is why lenders ask what the owner has contributed before deciding.
Real Example: Zhang Yin started Nine Dragons Paper with her own savings and a partner's, building a recycled-paper business from a personal stake long before any outside finance was involved.
Exam Matters: A Define (2 marks, WBS12 Appendix 6) on owner's capital needs the source AND that it is internal: money invested by the owner from personal savings, rather than obtained from outside the business.
Retained profit is what is left after tax and dividends and is kept rather than distributed: the main internal source for a business already trading profitably.
Retained profit is what remains of profit after tax has been paid and any dividends distributed to shareholders. The business keeps it and can reinvest it. It is internal because it comes from the business's own trading, not from anyone outside it.
The $36,000 paid for the second production line without a lender's approval or an investor's terms. That speed is the real advantage: an owner can decide to reinvest and act, where a loan application takes weeks and an equity round takes months.
The limitation is who can use it. A start-up has no profit to retain, so this source is closed to exactly the businesses that need finance most, and a loss-making firm has nothing to keep.
Real Example: Huawei has long funded research from profits it retains rather than from public shareholders, which is possible only because the trading is already profitable enough to leave something after distributions.
Exam Matters: An Explain (4 marks, WBS12 Appendix 6) on retained profit needs the reason and its consequence: no interest is charged, so the full amount reaches the investment rather than part of it servicing a debt.
Retained profit charges no interest, but it is not free: the money could have been distributed to owners or used elsewhere, and that forgone alternative is its opportunity cost.
It is common to read that retained profit "has no cost". It has no interest cost, which is not the same thing. Every source of finance costs something, and the cost of this one is the best alternative use that has been given up.
Yusra Foods retained $36,000. Placed on deposit at 5% a year instead, that money would have returned $1,800 — so the second production line has to earn more than $1,800 a year before it has beaten simply leaving the money alone.
This is why a profitable business still borrows. If a loan costs less than the return the money can earn inside the business, using retained profit instead is the more expensive choice, not the cheaper one.
Real Example: Shareholders in listed companies frequently press for higher dividends rather than further reinvestment, which is exactly this argument: the owners judging that they can use the money better than the business can.
Exam Matters: An Assess (10 marks, WBS12 Appendix 6) requires a judgement supported by the context given. Pricing the alternative — what the money would have earned elsewhere — turns "retained profit is cheap" into a comparison the judgement can rest on.
A business can raise cash by selling assets it owns, which suits equipment no longer needed but permanently removes whatever the asset was contributing.
The third internal source is sale of assets: turning something the business owns into cash. It is internal because the value was already inside the business; selling only changes the form it is held in.
Yusra Foods sold an ageing delivery van for $8,000 when it moved to a contracted distributor. The van was no longer needed, so the sale released cash without costing the business anything it was using.
A business selling assets it still needs is often a business that could not raise finance any other way, which is why the reason for the sale matters as much as the amount raised.
Real Example: Airlines across Asia and the Gulf routinely sell aircraft to leasing companies and lease them back, raising cash from assets they continue to fly every day.
Exam Matters: An Analyse (6 marks, WBS12 Appendix 6) wants the chain followed through: the asset sold, the cash raised, and what the business can no longer do — or must now rent — as a result.
A source is who the money comes from; a method is the form the money takes. The same source can offer several methods, and the same method can come from several sources.
The specification splits external finance into sources and methods, and the distinction is worth getting right before either list is learned, because answers that confuse them lose the thread of the question.
Underneath both lists sits one question that decides everything else: is the money borrowed or is part of the ownership being sold? Borrowed money is repaid with interest and the owner's stake is untouched. Money raised by issuing shares is never repaid, but the buyer now owns part of the business and shares in its profits and decisions.
Yusra Foods used both at the start: $90,000 borrowed from a bank and $60,000 from an angel who received shares for it.
Real Example: A supermarket chain can be financed by a bank loan, by shares held by the public and by credit from the suppliers who stock its shelves, all at the same time — three methods from three kinds of source.
Exam Matters: A Define (2 marks, WBS12 Appendix 6) on external finance needs the boundary stated: finance obtained from outside the business, rather than generated by its own trading or assets.
Family and friends lend or invest on terms no commercial provider would offer, and other businesses invest where the money buys a trading relationship as well as a return.
Two of the six sources provide money for reasons that are not purely financial, which is why their terms are unlike anything a bank offers.
Yusra Foods raised $30,000 this way. The money arrived quickly, with no credit check and at no interest, because the providers were backing a person rather than assessing a proposal. The cost is not financial: a business failure becomes a family problem, and informal arrangements with nothing written down are the ones that turn into disputes.
Later, a regional distributor lent Yusra Foods $50,000 on long terms, tied to a supply agreement. A business putting money into another business usually wants something beyond the return — secure supply, access to a market, or a closer tie to a customer it expects to grow.
Real Example: Alibaba's early funding included an investment from SoftBank, another business taking a stake rather than a bank making a loan, and the relationship shaped the company for years afterwards.
Exam Matters: An Explain (4 marks, WBS12 Appendix 6) on a source needs a reason developed: family finance is quick because no credit assessment is required, so a business needing money within days can use it where a bank could not respond in time.
A bank lends against evidence of repayment and security; a business angel invests personal money in a young business for a shareholding, and brings experience with it.
These two sources sit on opposite sides of the borrow-or-sell-ownership divide, and a start-up frequently needs both.
A bank is the most familiar source and the most demanding. It wants a plan, evidence that the repayments can be met, and usually security — an asset it can claim if they are not. Yusra Foods borrowed $90,000 against its production line. The bank's return is fixed, so it gains nothing if the business does unusually well, which is precisely why it will not accept much risk.
A business angel is a wealthy individual investing personal money in a young business for a share of it. Yusra Foods' angel paid $60,000 for 30,000 shares. An angel accepts a risk no bank would, because a shareholding rises without limit if the business succeeds — and typically brings industry experience and contacts that a young business values as much as the money.
Real Example: Many technology firms across South-East Asia raise their first outside money from individual investors who previously built companies of their own, rather than from banks that would have found no assets to lend against.
Exam Matters: An Analyse (6 marks, WBS12 Appendix 6) on choosing between them should follow one chain fully — the business has no security, so a bank will not lend, so the finance must come from an investor accepting risk for a share of the ownership.
Both raise money from many people online: peer-to-peer lends and is repaid with interest, while crowd funding gives backers shares, a reward or the product.
Two of the six sources exist because online platforms made it practical to raise money from many people at once rather than from one institution. They are easy to confuse and the specification names them separately.
Peer-to-peer funding is lending. A platform matches a business with many individual lenders, each providing part of the total, and the business repays with interest exactly as it would repay a bank. Yusra Foods raised $25,000 this way for a packaging upgrade. It is borrowed money: no ownership changes hands.
Crowd funding collects small amounts from a large number of people, usually through an online campaign. What the backers receive varies: shares in the business, a reward, or the product itself before it is made. Yusra Foods pre-sold $18,000 of a new product line to backers who received the first cases.
Real Example: Consumer hardware companies routinely launch products by pre-selling them to backers online, financing the first production run from customers rather than from a lender.
Exam Matters: An Explain (4 marks, WBS12 Appendix 6) on crowd funding can develop its second effect: the campaign is public, so reaching the target both raises the money and demonstrates demand to other providers.
A loan is a fixed sum repaid over an agreed period and suits a known long-term cost; an overdraft covers a short-term shortfall up to a limit and is charged only on what is used.
The first two methods are both borrowing from a bank, and they are built for opposite jobs.
A loan is a fixed sum, repaid in instalments over an agreed term with interest. Yusra Foods' $90,000 runs for 5 years at $1,800 a month: $108,000 repaid in total, of which $18,000 is interest. The repayment is known in advance, which makes it plannable, and the term can be matched to the life of whatever it bought.
An overdraft lets the business spend beyond its account balance up to an agreed limit — $20,000 for Yusra Foods — and interest is charged only on the amount actually used. It is built for a gap: the weeks between paying a supplier and being paid by a customer.
Real Example: Agricultural businesses commonly run an overdraft between planting and harvest and hold a separate long-term loan for land or machinery — the same firm using both methods for the jobs each is built for.
Exam Matters: A Calculate (4 marks, WBS12 Appendix 6) may ask for the total repaid or the interest on a loan. Show the working — monthly repayment, number of months, total — because the method is what a calculation question is testing.
Share capital is money raised by selling part of the ownership, so it is never repaid; venture capital is share capital provided by a fund investing in high-growth businesses.
Share capital is raised by issuing shares: an investor pays money and receives part of the ownership. It is permanent — the business never repays it — and in exchange the shareholder takes a share of the profits and a say in decisions.
The founder of Yusra Foods held all 120,000 shares. The angel's $60,000 bought 30,000 new shares at $2 each, taking the total to 150,000. The founder still holds the same number of shares but now 80% of the company rather than 100%. That is dilution: the stake shrinks because the company grew, not because anything was taken away.
Venture capital is the same method from a particular kind of source: a fund that invests other people's money in businesses with high growth potential, usually taking a substantial stake and a seat at the table. It arrives in larger amounts than an angel can provide and with more conditions attached.
Real Example: Venture capital funds backed Sea Limited and Grab through several rounds before either listed publicly, taking large stakes in businesses that were not yet profitable.
Exam Matters: A Calculate (4 marks, WBS12 Appendix 6) may ask for a shareholding after a new issue. Divide the shares held by the new total in issue — the denominator is what changes, and using the old one is the error the question is testing for.
Leasing rents an asset instead of buying it, trade credit delays payment to suppliers, and a grant is money that need not be repaid but comes with conditions attached.
The last three methods all provide finance without a sum of money being borrowed at all, which is why they are easy to overlook when a question asks how a business could fund something.
Leasing pays to use an asset rather than to own it. Yusra Foods' packing machine costs $40,000 to buy or $900 a month to lease for 48 months — $43,200 in total, or $3,200 more than buying. The premium buys the avoidance of a $40,000 outlay the business may not have, and maintenance is usually included.
Trade credit is a supplier agreeing to be paid later — 60 days for Yusra Foods on $15,000 of deliveries a month, so up to $30,000 of materials is held before any cash leaves. It is interest-free, but suppliers may offer discounts for early payment, and late payment damages the relationship the business depends on.
A grant is money that does not have to be repaid, usually from a government or development agency supporting a particular activity. Yusra Foods received a $20,000 export development grant conditional on hiring two staff. Grants are competitive, slow to obtain and restricted to the purpose stated.
Real Example: Logistics firms commonly lease their vehicle fleets rather than owning them, converting a large purchase into a monthly cost and leaving maintenance with the lessor.
Exam Matters: A Calculate (4 marks, WBS12 Appendix 6) on leasing wants the comparison completed: the total of the lease payments set against the purchase price, and the difference stated as the extra cost of leasing.
Suitability is what both external finance leaves ask for: the purpose, the amount, the time period and the acceptable cost to control decide the choice.
The specification asks for sources and methods and their suitability for different circumstances, which is the part an answer is judged on. Four questions decide it.
Run the four over Yusra Foods' opening $240,000. Premises and a production line last years, so the finance must be long-term: an overdraft is ruled out immediately. The amount far exceeds the founder's $60,000 of savings, so outside money is required. The bank lends $90,000 against the line but not the whole sum; $30,000 comes from family on terms no commercial provider would offer; and the last $60,000 must come from someone accepting risk without security — which costs ownership.
That is why the package has four parts rather than one. The weak answer names a single "best" source; there is no such thing, because the four questions have different answers for different businesses.
Real Example: A manufacturer expanding into a new market will typically hold a long-term loan for the factory, an overdraft for seasonal stock and supplier credit for materials, each chosen for a different need.
Exam Matters: An Assess (10 marks, WBS12 Appendix 6) requires a judgement supported by the context in the source. Naming the circumstance that decides it — the purpose, the amount, the period or the owner's willingness to give up control — is what turns a comparison into a judgement.
A sole trader is one owner and a partnership two or more; neither is separate in law from its owners, which is what limits the finance available to them.
The specification names three forms in 4a, and the first two share the feature that matters: the business has no separate legal identity. In law the owner and the business are the same person.
A sole trader is a single owner. Setting up requires almost nothing, the owner keeps all the profit and answers to nobody, and decisions can be made the same day. Against that, the owner carries every loss personally and the business is limited to what one person can fund and do.
A partnership is two or more owners trading together, usually under an agreement setting out shares of profit and responsibility. Partners bring more capital and complementary skills — one may know the product and another the market — but decisions must now be agreed, profits are divided, and in a general partnership each partner can be held responsible for the others' business debts.
Real Example: Most workshops, clinics and market traders anywhere in the world operate as sole traders or partnerships: the forms are the default for a business that needs no outside capital.
Exam Matters: An Explain (4 marks, WBS12 Appendix 6) on a partnership needs a reason developed into a consequence: two owners bring more capital, so the business can start at a scale a single owner could not fund.
A private limited company is a separate legal entity owned by shareholders, whose shares are sold privately rather than offered to the public.
The third form in 4a is the private limited company (Ltd), and it differs from the first two in a way that changes everything about its finance: the company is a separate legal person. It owns the assets, owes the debts and signs the contracts in its own name.
Ownership is divided into shares, held privately — sold to people the existing owners agree to, not to the public. This is what let Yusra Foods take the angel's investment: there were shares to sell, and a sole trader would have had nothing to offer.
The costs are real: incorporation, ongoing filing and public accounts a competitor can read. Businesses accept them when the finance a company can raise, or the protection it gives, is worth more than the disclosure it requires.
Real Example: Family firms across Asia and the Gulf frequently incorporate as private companies while keeping every share inside the family, taking the separate legal identity without opening ownership to outsiders.
Exam Matters: A Define (2 marks, WBS12 Appendix 6) on a private limited company needs both halves: a separate legal entity owned by shareholders, whose shares are not offered to the public.
A franchisee pays a fee and royalties to trade under an established brand and proven model, buying lower risk with independence and a share of revenue.
Franchising is the first of the forms in 4b. A franchisor owns a brand and a business model and licenses them; a franchisee pays to trade under that brand in a particular place, following the franchisor's system.
For an entrepreneur, the trade is lower risk for lower freedom and a permanently smaller share of the revenue. For the brand owner, it is the fastest way to grow a network without funding every site — which is why franchising appears in a topic about raising finance at all.
Real Example: Large restaurant chains across Asia and the Middle East are built almost entirely from franchised outlets, each funded by the local operator rather than by the brand that owns the name.
Exam Matters: An Analyse (6 marks, WBS12 Appendix 6) on franchising should follow one chain: the franchisee trades under a known name, so it attracts customers from the first day, so the risk of failure is lower than for a new independent business.
These three forms are defined by their purpose or their setting rather than their legal status: a social aim, a life the owner wants, or a business that trades online.
The rest of 4b names three more forms. Unlike sole trader or company, these describe what the business is for or where it trades, not its legal structure — each can be a sole trader or a company underneath.
A social enterprise trades to achieve a social or environmental aim, reinvesting most of its surplus into that purpose rather than distributing it to owners. It is a business, not a charity: it earns revenue by selling. Its finance differs — grants and mission-aligned investors are open to it, while investors seeking maximum returns are not.
A lifestyle business is run to support the life the owner wants rather than to grow as large as possible. Growth is a choice it declines. Its finance is usually the owner's capital and retained profit, because outside investors want growth the owner is not seeking.
An online business trades through a website or platform rather than premises. Start-up costs are lower and the market is wider from day one, but competition is immediate and visible, and the business depends on platforms whose terms it does not control.
Real Example: Grameen Bank was built to extend credit to borrowers banks would not serve, earning revenue from lending while pursuing a purpose that shaped which investors would fund it.
Exam Matters: An Explain (4 marks, WBS12 Appendix 6) on a lifestyle business needs the consequence stated: the owner is not seeking growth, so equity investors who require it are not a realistic source of finance.
A public limited company may offer its shares to the public, and flotation raises large sums at the cost of opening ownership, and control, to buyers the founders do not choose.
Leaf 4c is the last step: growth to a public limited company (plc) and stock market flotation. A plc may offer its shares to the public, which no other form may do. Flotation is the act of listing those shares on a stock exchange so anyone can buy them.
The company issues 150,000 new shares at $6 each, raising $900,000 — more than the whole original funding package. Shares in issue rise to 300,000, so the founder's stake falls from 80% to 40%, the angel's from 20% to 10%, and the public holds 50%.
Note what the founder's 40% means: the largest single holding, but not a majority. Control now depends on other shareholders agreeing.
Real Example: Saudi Aramco and Alibaba both listed shares publicly after long periods in private hands, raising sums no private investor could have provided and accepting public reporting in exchange.
Exam Matters: A Calculate (4 marks, WBS12 Appendix 6) on flotation may ask for the sum raised or a stake afterwards. Multiply the new shares by the issue price for the first; divide a holding by the enlarged total for the second.
Where a business has no separate legal identity, its debts are the owner's debts, so a failure can reach the owner's personal assets without limit.
Unlimited liability follows from the point made in chapter 4: a sole trader or partnership is not separate from its owners in law. If the business cannot pay a debt, the debt does not stop at the business — it is already the owner's.
A supplier owed money by a sole trader is owed money by that person, and can pursue their savings, their car and in some circumstances their home. There is no ceiling: the amount at risk is the size of the debt, not the size of the investment.
This changes behaviour long before any failure. An owner facing unlimited liability takes fewer risks, borrows less, and may turn down expansion that a company would pursue — so liability shapes not only the consequences of failure but the decisions taken every day.
Real Example: Owners of unincorporated businesses that fail commonly lose personal savings alongside the business, because the creditors were always the owner's creditors rather than the firm's.
Exam Matters: A Define (2 marks, WBS12 Appendix 6) on unlimited liability needs the cause and the effect: the owner is not legally separate from the business, so is personally responsible for its debts in full.
Limited liability caps a shareholder's loss at what they paid for their shares, which encourages investment and risk-taking, but it is paid for with disclosure and is not absolute.
Leaf 5a asks for the implications of limited and unlimited liability, including advantages and disadvantages. Limited liability means a shareholder can lose what they paid for their shares and no more; the company owes its debts, and the company is not the shareholder.
It is also not absolute, and this is the part students most often miss. A bank lending to a small company will usually require a personal guarantee from the owner — a promise to pay personally if the company does not — which puts the owner back where an unlimited liability business started, for that debt.
So limited liability protects shareholders from the company's creditors generally, but an owner who signs a guarantee has agreed to set it aside for the lender who asked.
Real Example: Shareholders in a listed company that collapses lose the value of their shares and nothing more, which is why millions of people are willing to hold shares in businesses they take no part in running.
Exam Matters: An Assess (10 marks, WBS12 Appendix 6) requires a supported judgement in context. The personal guarantee is what lets an answer judge rather than list: the protection is real for investors and much weaker for an owner-manager borrowing from a bank.
Legal form decides which finance a business can reach: only a company can issue shares, so an unincorporated business must borrow or use its own resources.
Leaf 5b is what this section has been building towards: finance appropriate for limited and unlimited liability businesses. Legal form closes some doors outright.
Yusra Foods' history is the whole leaf in one line: $60,000 of the founder's savings and $30,000 from family while it was small, then incorporation, then $60,000 from an angel — which required shares, which required a company.
Real Example: A partnership wanting outside equity has to incorporate first, which is why growing professional firms and family businesses so often become companies at the point they need capital they cannot supply themselves.
Exam Matters: An Evaluate (20 marks, WBS12 Appendix 6) requires a supported judgement. The strongest structure here weighs what incorporating opens — equity finance, easier borrowing, capped loss — against what it costs, and says which matters more for the business in the source and why.
A business plan is a written document setting out what the business will sell, to whom, how it will operate and what it expects to earn and spend.
Inside the business, a plan forces decisions to be thought through before money is committed, and gives targets that later performance can be measured against.