Sources of Finance
Internal and External Sources of Finance · Evaluating Finance Sources — The Cost, Control, Risk Framework
IB Business Management SL topic guide
Finance and Accounts
Finance and Accounts is a core part of IB Business Management SL. This guide connects the syllabus ideas behind Sources of Finance, Costs and Revenues, Break-even Analysis, Final Accounts, Profitability and Liquidity Ratio Analysis and 2 more units, shows how they appear in worked problems, and points you to the formulas and full lessons needed for exam revision.
What you will learn
Finance and Accounts syllabus outline
The units below follow the structure used in the full Study to Learn course. Use the outline to identify exactly which idea needs attention, then work through the public example before continuing to the complete lesson path.
Costs and Revenues
Fixed, Variable Costs and Contribution · Contribution Analysis and Special Order Decisions
Break-even Analysis
Break-even Point and Margin of Safety · Using Break-even Analysis for Strategic "What If" Decisions
Final Accounts
The Income Statement and Statement of Financial Position · Interpreting Final Accounts — Profit Quality and Window Dressing
Profitability and Liquidity Ratio Analysis
Profitability and Liquidity Ratios · Ratio Analysis in Context — Industry Benchmarks and Trend Analysis
Cash Flow
Cash Flow Forecasts and Managing Cash Flow · Cash Flow vs Profit — The Working Capital Cycle
Investment Appraisal
Payback Period and Average Rate of Return · Non-Financial Factors in Investment Decisions
Free worked preview
Internal and External Sources of Finance
This complete preview comes from the Sources of Finance unit. It introduces the core language, shows the method in context, and gives you a real example of the lesson quality before you create an account.
Sources of Finance
Every business decision — from buying a new machine to bridging a temporary cash shortfall — requires money, but not all money is the same. The source of finance determines its cost, who has a claim on the business, and how much risk the business takes on. This subtopic opens Unit 3 by cataloguing internal and external finance sources and establishing the matching principle. After this lesson, you will be able to distinguish internal from external sources, classify instruments like overdrafts, leasing, and debt factoring, and explain why short-term needs should be funded with short-term finance and long-term assets with long-term finance.
Internal Sources
Retained profit (reinvesting past earnings), sale of assets, and reducing working capital — using resources the business already has.
External Sources
- Share capital — money raised by issuing shares in exchange for part-ownership
- Loan capital and overdrafts — borrowed money, repaid with interest
- Trade credit — delaying payment to suppliers
- Leasing — using an asset without buying it outright
- Debt factoring — selling unpaid invoices to a third party for immediate (discounted) cash
- Business angels / venture capital / crowdfunding — external investors providing capital, often for start-ups or high-growth businesses
Matching Finance to Purpose
Short-term needs (e.g. a temporary cash flow gap) should be funded with short-term finance; long-term needs (e.g. buying a factory) should be funded with long-term finance — mismatching the two creates unnecessary risk.
Common ErrorFunding a long-term asset with a short-term source like an overdraft creates repayment and liquidity risk — the short-term debt will need refinancing long before the asset has paid for itself.
Scenario
A start-up funds its initial equipment purchase (long-term need) with a long-term bank loan, but uses a short-term overdraft to smooth out a temporary seasonal dip in cash flow (short-term need) — matching each source to its purpose.
Practice QuestionExplain one advantage and one disadvantage of raising finance through share capital, compared to a bank loan.
Reviewed by the Study to Learn editorial team · Updated 2026-07-24