Unit 5.1 — Nature and purpose of finance
Learning outcomes (from the 9587 syllabus). This note is complete when every bullet below is covered.
Learning outcomes
- Financial objectives: importance of setting financial objectives; to maximise the wealth of shareholders (raising funds at the lowest possible cost; utilising funds to maximise returns at minimum risk)
- Need for finance: start-up capital; growth and expansion
Running example used throughout Unit 5: Swift Logistics, a courier company planning to buy new vans and open a new depot.
Big picture
In plain English: finance is about money — where to get it, and how to use it well. A business needs finance to start up and to grow, and its financial objective is usually to make the owners wealthier.
Analogy: finance is like the fuel and the fuel budget of a car. You need enough fuel to start the journey (start-up capital) and more to go further (growth), and you want to buy fuel cheaply and use it efficiently.
Core content
1. Financial objectives
Importance: financial objectives give the business clear money targets and guide all financial decisions (what to spend, how to fund it).
The key objective in the syllabus is maximising shareholder wealth (making owners richer), achieved by:
- Raising funds at the lowest possible cost — borrowing and issuing shares cheaply.
- Utilising funds to maximise returns at minimum risk — investing money where it earns the most for the least risk.
Swift Logistics wants to maximise Mr Lim’s wealth. It raises money by choosing the cheapest source (e.g. a low-interest bank loan rather than expensive overdraft), and invests it in projects that earn high returns with acceptable risk (e.g. buying vans that quickly pay for themselves).
2. The need for finance
- Start-up capital — money needed to set up the business (rent, equipment, stock, licences).
- Growth and expansion — money needed to grow (new outlets, more machines, more staff, entering new markets).
When Mr Lim first started Swift, he needed start-up capital for a van, a small office and licences. Now, to open a new depot, Swift needs growth finance for more vans, rent and extra couriers.
Analysis & evaluation points (AO3/AO4)
- Maximising shareholder wealth can conflict with other objectives — cutting costs to raise profit may harm employees or customers.
- “Lowest cost” and “minimum risk” often pull in opposite directions — the cheapest source may be the riskiest, so the business must balance them.
- Start-up finance is hardest to get — new businesses are risky, so lenders charge more or refuse.
Language bank: however · on balance · it depends on · trade-off ·
Worked examples (PEEL)
PEEL = Point → Explain → Example → Link. Use this structure for every written answer.
Worked example 1 — “Explain” (6 marks)
Question: Explain why a business needs finance for growth.
- P (Point): Growth requires spending that current cash cannot cover.
- E (Explain): Expanding means buying new assets, hiring staff and funding more stock before the extra sales arrive, so the business needs external or retained funds.
- E (Example): Swift needs to buy 10 new vans and rent a depot before it can serve more customers.
- L (Link): Without this finance, the business cannot grow and may lose market opportunities.
Worked example 2 — “Evaluate” (10 marks)
Question: Evaluate whether maximising shareholder wealth should be the only financial objective of a business.
- P (Point): Maximising shareholder wealth attracts investors and funds growth.
- E (Explain): Higher returns encourage shareholders to invest more, giving the business capital to expand.
- E (Example): If Swift consistently grows profits, Mr Lim and new investors are willing to fund its expansion.
- L (Link): This supports the business’s long-term growth.
- Evaluate (AO4): However, focusing only on shareholder wealth may lead to cutting costs that harm workers, customers or the environment, damaging the business long-term. On balance, shareholder wealth should be a key objective, but balanced with stakeholder interests.
Application bank (Singapore quick reference)
| Idea | Singapore example |
|---|---|
| Start-up finance | New hawker stalls and start-ups funded by savings, family or government grants |
| Growth finance | SMEs using bank loans or government schemes (EnterpriseSG) to expand |
| Shareholder wealth | Listed firms (DBS, Singtel) aiming to raise share value and dividends |
Exam technique
- How it appears: a case study describes a business needing money and asks why finance is needed or what its financial objective should be.
- Model skeleton for “why is finance needed?”: state the purpose (start-up/growth) → what the money buys → why current cash is insufficient.
- Common pitfalls: listing uses of finance without linking to start-up vs growth; ignoring the trade-off between cost and risk of funds.
Self-test checklist
Essay practice: “Evaluate the view that a business’s main financial objective should be to maximise shareholder wealth.” (25 marks)