The day before the first loaf: It is the night before Lena's bakery opens. The oven is in, the shelves are up, the rent deposit is paid and the sign is over the door.
She has spent almost everything she had, and she has not yet sold a single loaf.
Every business starts like this. It has to pay for things before any customer pays it. The money a business raises and uses to pay for what it needs is its finance.
Lena's finance was $12,000 of her own savings and a $6,000 bank loan (1.1.4). Here is where the $18,000 went.
| What Lena paid for | Cost | Why she needed it before opening |
|---|---|---|
| A second-hand oven | $9,000 | No oven, no bread |
| Counter, shelves and a mixer | $5,000 | Somewhere to make the dough and to sell the loaves |
| Rent deposit | $1,200 | The landlord would not hand over the keys without it |
| Food licence, sign and first packaging | $800 | She cannot legally sell food without the licence |
| Kept in the bank for the first weeks | $2,000 | Flour and wages fall due before the sales build up |
| Total | $18,000 |
Money to start up: The money to open a business (start-up capital) pays for everything that must be in place before the first sale.
Notice the last row. Even on the day it opens, a business needs money in hand, because the bills of the first weeks arrive before the customers do.
Without that $18,000 there is no bakery at all, however good Lena's bread is. That is the first role of finance: it turns an idea into a business that can open its doors.
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Years later, Lena's Bakery Ltd runs three shops and a bakehouse on Mill Lane. It sells about $1,600,000 of bread, cakes and lunches a year. Surely a business that size pays its way?
It does, over a whole year. Week by week, the money still has to be there first.
| What the bakery pays for, every week | About |
|---|---|
| Wages for 22 people | $14,400 |
| Flour and ingredients, mostly from Valley Grain | $9,200 |
| Rent and electricity for three shops and the bakehouse | $3,500 |
| Everything else: van fuel, repairs, insurance | $2,000 |
| Total, every week | $29,100 |
Money to keep running: The wages go out every Friday. The flour is used up in a night. But money waiting in a customer's bank or on a shelf cannot pay Friday's wages.
Where the money is waiting
- Customers who owe. The cafés and hotels that buy bread wholesale pay at the end of the month. At the end of 2025 they owed the bakery $40,000.
- Stock. Another $15,000 sits on the shelves as flour, butter and packaging not yet baked.
So even a large, successful business needs money for its day-to-day running: enough to pay this week's bills while it waits to be paid for last week's bread. You met the small version of this in 1.1.6, when Lena's tin was empty in week three while four customers owed her for loaves already delivered.
And the week nobody planned for: Running money is also what carries a business through a bad patch: a van that breaks down, a sudden rise in the price of flour, a quiet January after a busy December.
A business with no money in reserve can close on one bad month, even when the other eleven are good.
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The bakehouse on Mill Lane: Three shops each baking their own bread was costly, so Lena and Marco built one large bakehouse on Mill Lane to bake for all of them (1.4.3).
It cost $600,000, and $400,000 of that was borrowed from the bank. It saves the company about $90,000 a year.
Look at the order of events. The whole $600,000 had to be paid before the bakehouse saved a single dollar. The savings then arrive a year at a time.
At a profit of $60,000 a year, saving up for the bakehouse would have taken ten years. That is the third role of finance: it lets a business grow now, and pay for the growth out of what the growth earns later.
Three jobs finance does at Lena's bakery
Start up
$18,000 for the oven, the counter, the deposit and the licence, all before the first loaf was sold.
Keep running
About $29,100 a week in wages, flour and rent, paid while the cafés and hotels owe $40,000 for bread already delivered.
Grow
$600,000 for the Mill Lane bakehouse, paid at once and earned back at about $90,000 a year.
Look again at what the money bought in those three stories. It falls into two kinds of spending.
Things kept for years
- The oven, the counter, the vans, the Mill Lane bakehouse
- Bought once and used again and again, for many years
- Called capital expenditure
Things used up in running
- Flour, wages, rent, electricity, van fuel
- Paid for again and again, and used up within the year
- Called revenue expenditure
Two kinds of spending: Spending on things the business keeps and uses for more than a year is capital expenditure. Spending on the day-to-day costs of running it is revenue expenditure.
Finance has to pay for both. Learn the two names and one example of each.
How this comes up: Short questions tied to a case ask why a business needs finance. The same idea also opens longer questions.
Where it comes up
- State two reasons why businesses need finance: two marks.
- Explain why a named business needs finance: one reason for two marks, or two reasons for four.
- Longer questions: a business must spend heavily on a new factory or more capacity before the money comes back.
The four-mark pattern
- Name the first reason. To keep running: bills fall due before customers pay.
- Show it in the case. Wages go out every Friday, but the cafés and hotels pay monthly and owed the bakery $40,000 at the end of 2025.
- Name the second reason. To grow: a big purchase must be paid for before it earns anything.
- Show it in the case. The Mill Lane bakehouse cost $600,000 and saves about $90,000 a year, so the money had to come before the savings.
The trap: two reasons that are really one: 'To pay wages' and 'to buy flour' are two bills, but one reason: both are money to keep running. The second reason must be a different job, such as starting up or growing.
The second trap: where, not why: Naming where the money comes from, such as a bank loan, is a trap too. The question asks why the business needs money, not where it gets it.
Explain two reasons why Lena's Bakery Ltd needs finance.
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