HookWilko had shops, customers and 93 years of history — what it didn't have was cash
In August 2023 Wilko collapsed into administration: roughly 400 shops gone and about 12,500 jobs lost from a family firm that had traded since 1930. Here is the uncomfortable detail: people were still shopping there. Wilko did not run out of customers — it ran out of cash. The mechanism was brutally simple. As losses mounted (nearly £40 million in a single year), the insurers who protect suppliers against unpaid invoices withdrew their cover. Suppliers, suddenly exposed, demanded payment up front. Paying up front drained the remaining cash, so orders shrank, so shelves gaped, so shoppers left with half-empty baskets, so the cash position got worse again. A £40 million emergency loan from a restructuring specialist bought months, not years — and the family's decision to keep paying dividends, including £3 million in a loss-making year, became the detail every business student should memorise.
All four leaves of 3.6 are in the wreckage. Where can a business get money, and why do lenders sometimes say no (3.6.1)? Why is profit an opinion but cash a fact, and how does a cash-flow forecast spot the cliff-edge months in advance (3.6.2)? How do costs, revenue and break-even define the floor a business must clear every month (3.6.3)? And how do margins and investment returns tell outsiders — banks, suppliers, investors — whether a business deserves their money (3.6.4)? Finance is where the exam stops asking you to discuss and starts asking you to compute. Every formula in this section is a free mark for the prepared.
ModelWhere the money comes from — and what each source costs
Internal sources come from inside the business. Retained profit — profit kept back rather than paid out to the owners — is the cheapest money there is: no interest, no repayments, no loss of control. Its limits: it builds slowly, and losses destroy it, which is why Wilko had nothing left to absorb the shock. Selling assets (a van, a building, a warehouse) raises cash once, ideally from things the business no longer needs — or, in a crisis, from things it does. Owners' own savings complete the internal set for small firms.
External sources bring outside money with outside strings. A bank loan delivers a lump sum repaid with interest over years: predictable instalments, but usually secured against assets, and the repayments fall due in bad months too. An overdraft lets the current account go negative up to an agreed limit — ideal for short timing gaps, expensive per pound borrowed, and repayable on demand. Trade credit — take stock now, pay the supplier in 30 or 60 days — is interest-free finance for the length of the delay, and Wilko is the textbook case of what happens when it vanishes overnight. A share issue raises permanent capital that never has to be repaid, at the price of diluted ownership and shared future profits. Hire purchase spreads the cost of equipment over instalments; government grants are free but rare and conditional; crowdfunding gathers many small sums online — BrewDog funded years of expansion through its 'Equity for Punks' rounds. The exam skill is matching: short-term need, short-term source; long-term asset, long-term finance.
DataCash flow: the forecast that sees trouble coming
Cash is the money actually available right now — and it is not profit. A sale on credit creates profit today and cash in 60 days; wages, rent and suppliers will not wait the 60 days. A business is insolvent when it cannot pay its bills as they fall due, and profitable businesses die this way — the single most important sentence in 3.6.
A cash-flow forecast predicts, month by month: cash inflows (sales receipts, loans received, capital introduced), cash outflows (stock, wages, rent, loan repayments), net cash flow = inflows − outflows, and the running position: closing balance = opening balance + net cash flow, which becomes next month's opening balance. Its power is early warning. A predicted negative month can be fixed cheaply in advance: an arranged overdraft, a delayed purchase, chasing customers to pay faster, or negotiating longer to pay suppliers — gently, because squeeze suppliers too hard and, as Wilko discovered, they squeeze back harder. Forecasts remain educated guesses: a cold summer, a new rival or a rent review can wreck the assumptions, which is why lenders read the forecast alongside the business's record of forecasting honestly.
A seaside kiosk forecasts its quarter. April: inflows £3,000, outflows £5,500 (the annual insurance premium falls due) → net cash flow = 3,000 − 5,500 = −£2,500; opening balance £2,000, so closing balance = −£500. May: inflows £6,000, outflows £4,000 → net +£2,000, closing balance +£1,500. June: inflows £9,000, outflows £5,000 → net +£4,000, closing balance £5,500. Across the quarter the kiosk is comfortably cash-positive — £18,000 in against £14,500 out — yet in April it cannot pay its bills. The forecast turns that discovery from a bounced payment into a phone call: an arranged £1,000 overdraft for six weeks costs a few pounds of interest, while an unarranged overdraft or an unpaid insurer costs far more. When an exam table shows this pattern, the marks live in the April row: name the month, quote the closing balance, prescribe the fix.
ModelBreak-even: the floor every business must clear
Start from the cost vocabulary: fixed costs stand still as output changes (rent, salaries, insurance), variable costs move with every unit made (materials, packaging), and revenue = price × quantity sold. Each unit sold contributes its price minus its variable cost towards paying off the fixed-cost pile, so break-even output — the sales level where the business neither profits nor loses — is fixed costs ÷ (selling price per unit − variable cost per unit). Below it, every unsold unit deepens the loss; above it, every extra sale is profit. The margin of safety = actual sales − break-even sales: how far demand can fall before losses begin. On a break-even chart it is the horizontal gap between current output and the point where the total-revenue and total-cost lines cross.
Businesses use the model to set minimum targets, to test what-if questions — a rent rise, a price cut, a cheaper supplier — and to persuade lenders that the numbers hold. Treat its limits as evaluation ammunition: the model assumes a single product, one unchanging price, every unit made is sold, and costs that split neatly into fixed and variable. Real businesses discount, waste stock and hit stepped costs, so break-even is a compass rather than a satnav.
A T-shirt printer pays £4,500 a month in fixed costs, sells at £12, and each shirt costs £6 in blanks and ink. Break-even = 4,500 ÷ (12 − 6) = 750 shirts a month. Selling 900, the margin of safety is 900 − 750 = 150 shirts — demand can slip about 17% before losses start. Now the landlord raises fixed costs to £5,400: break-even = 5,400 ÷ 6 = 900 shirts, and the margin of safety is zero — the business must sell every shirt it currently sells just to stand still. The response options drop straight out of the formula: raise price to £13 (break-even = 5,400 ÷ 7 = 771.4, so 772 shirts — always round UP, because at 771 the fixed costs are not quite covered), find cheaper blanks to cut variable cost, or find cheaper premises. One formula, four business decisions.
DataMargins and ARR: reading the score
The income statement tells a year's story in four lines: revenue, minus cost of sales (the direct cost of what was sold), gives gross profit; minus expenses and overheads (rent, marketing, admin, interest) gives net profit. Raw profit figures mislead across businesses of different sizes, so convert them to margins: gross profit margin = gross profit ÷ revenue × 100, and net profit margin = net profit ÷ revenue × 100 — pence of profit kept from every £1 of sales. Comparison gives the numbers meaning: against last year (improving or decaying?) and against rivals (a supermarket keeping around 3p per £1 is normal; a jeweller on 3p is in trouble). A healthy gross margin sitting above a weak net margin points the investigation at overheads, not at pricing — the diagnosis skill AQA rewards.
For investment decisions, the average rate of return compares projects on one scale: ARR = average annual profit ÷ cost of investment × 100, where average annual profit = total profit over the project's life ÷ number of years. Judge the result against the alternatives — bank interest, rival projects — and against risk, because forecast profits are promises, not facts.
A bakery-café turns over £250,000. Ingredients and packaging (cost of sales) come to £100,000, so gross profit = £150,000 and gross profit margin = 150,000 ÷ 250,000 × 100 = 60%. Expenses — rent, wages, utilities, card fees — total £120,000, so net profit = £30,000 and net profit margin = 30,000 ÷ 250,000 × 100 = 12%. A rival café reports a 55% gross margin but an 18% net margin: it pays slightly more for ingredients yet runs far leaner overheads, and saying exactly that comparison out loud is the analysis mark. Now an investment: a £20,000 coffee machine is forecast to add £24,000 of profit over four years. Average annual profit = 24,000 ÷ 4 = £6,000, so ARR = 6,000 ÷ 20,000 × 100 = 30% — attractive against bank interest of around 5%, provided you flag that the £24,000 is a forecast, not a fact.
CaseThe death spiral: how the four leaves interlock
Run Wilko back through the toolkit and 3.6 stops being four separate formulas and becomes one dashboard. Discount retail runs on thin margins, so years of losses meant no retained profit left to absorb shocks — 3.6.4 explaining 3.6.1. Thin margins and sliding sales made lenders wary: the emergency £40 million was well short of what the business had hoped to raise, because lenders read the same statements you can now read. The fatal blow was pure cash-flow mechanics: losing trade credit converted every future outflow into an immediate one — precisely the scenario a cash-flow forecast exists to flag while there is still time to act (3.6.2 meeting 3.6.1). And with revenue falling while fixed costs — hundreds of shop leases — stood still, break-even output climbed steadily out of reach (3.6.3). Meanwhile £3 million left the business as dividends in a loss-making year: money that, retained, would have been the cheapest finance available.
Examiners love this interlock in the happy direction too: a strong business shows margins feeding retained profit, retained profit funding investments chosen by ARR, and a forecast keeping the whole machine liquid through the seasons. Learn the connections, not just the formulas — the 9-markers live in the joins.
VocabularyKey terms the mark scheme pays for
TrapsMisconceptions that cost marks
ExamWhat examiners want
Finance sits on Paper 2 and carries the heaviest calculation load in the course, and AQA expects the formulas from memory: break-even output, margin of safety, gross and net profit margin, ARR, net cash flow and closing balance. The routine that banks the marks is the same three lines every time — formula, substitution, answer with the right unit (£, units or %) — because method marks survive arithmetic slips, and an answer without its unit is an answer taxed a mark.
Then interpret, because the 9-marker is never really 'calculate'. An ARR of 30% means nothing until it is set against bank interest and the riskiness of the forecast; a falling net margin beneath a stable gross margin points at overheads; a cash-flow table is answered by naming the deadly month, quoting its closing balance, and prescribing the matched fix — an arranged overdraft for a timing gap, not a five-year loan. Source-of-finance recommendations score when they match the source's term to the purpose's term and weigh control and existing debt: an overdraft for a machine, or a share issue for a stock top-up, are both category errors worth calling out. Two options, case evidence, one decision, one named deciding factor — every time.