welcome to ib business management
unit 3

Unit 3: Finance – Unlocking the Secrets Behind Business Success (and Scandals!)

Welcome to Unit 3: Finance—the unit that’s all about the money. If you think finance is boring, think again! This unit isn’t just about numbers on a page; it’s the very lifeblood of a business. From determining how much profit a company makes to understanding why some businesses go bankrupt while others skyrocket in value, finance is the lens through which we see a company’s health, its decision-making, and, often, its downfall.

What’s Covered in Unit 3?

Unit 3: Finance breaks down the core elements of financial management. You’ll explore everything from the profit and loss account (P&L) to the balance sheet, and discover how businesses use financial statements to make critical decisions. Let’s dive into what this unit covers, with real-world examples to spice things up!

3.1 Introduction to Finance

This section lays the groundwork by introducing you to the fundamental principles of finance. You’ll learn how companies raise money, how they manage financial risk, and how financial statements like the P&L and balance sheettell the story of a company’s financial health. Want to understand why GameStop’s stock price soared in 2021? Or why Wirecard collapsed in one of the biggest corporate scandals in recent history? This is where it all starts! The concepts in this unit will help you understand why companies like GameStop and Wirecard either hit financial jackpots or imploded.

3.2 Sources of Finance

In this sub-unit, you’ll learn about the various ways companies can secure financing. From personal funds to loans, shares, and venture capital, businesses have options, but not all options are created equal. The COVID-19 pandemic made it painfully clear how critical access to finance is. For example, Tesla’s ability to raise funds through the stock market fueled its growth, while Airlines, like Lufthansa, had to tap into government bailout funds to stay afloat. Understanding how businesses decide to raise funds can give you insight into their strategy and how well they’re prepared for challenges.

3.3 Costs and Revenues

The costs and revenues section dives into the financial ins and outs of business operations. How do businesses ensure they’re generating enough revenue to cover their costs? You’ll learn about fixed costs, variable costs, and profit margins, with real-life examples like Amazon’s razor-thin profit margins on its e-commerce business and Apple’s highly profitable iPhone sales. Knowing how to analyze a profit and loss account helps you understand whether a business is truly profitable or just faking it with high revenue but poor margins.

3.4 Final Accounts

In this section, you’ll analyze two of the most critical financial statements: the profit and loss account and the balance sheet. These statements are more than just dry documents—they’re a company’s story. The P&L reveals the company’s performance over a specific period, showing whether it made or lost money. The balance sheet provides a snapshot of the company’s financial position, revealing its assets, liabilities, and equity. Take Wirecard, for example—before its massive accounting scandal, the company’s balance sheet made it look like a rising fintech star. But poor financial practices, including overstated assets and misleading liabilities, led to its collapse. You’ll see how a well-maintained balance sheet can be the difference between success and a spectacular fall from grace.

3.5 Profitability and Liquidity

Profitability and liquidity are key indicators of a company’s health, showing how well it can generate profit and manage its cash flow. This section teaches you how to calculate essential financial ratios, like the gross profit marginand the current ratio. A perfect example is Tesla—despite being highly profitable, its liquidity has fluctuated over time. In contrast, JCPenney, once a retail giant, struggled with both profitability and liquidity, leading to bankruptcy. Understanding these metrics will allow you to assess a company’s financial stability.

3.6 Investment Appraisal

This sub-unit takes you into the world of investment decisions. How do businesses decide where to invest their money? You’ll learn how companies use tools like payback period, net present value (NPV), and average rate of return (ARR) to make investment decisions. A great example is Apple, which has carefully evaluated its investments in new technologies, such as the Apple Watch and self-driving car technology, based on these metrics. You’ll also see how these tools help assess the risk and return of business ventures.

Real-World Financial Drama: From Bankruptcy to Stock Market Stars

Let’s face it—finance isn’t all spreadsheets and formulas. Sometimes, it’s about real financial drama. Take Wirecard—a German fintech company that was once valued at over $20 billion. Its sudden collapse in 2020 revealed one of the most shocking cases of financial malpractice. Its balance sheet was artificially inflated, hiding billions in missing funds. This is a perfect case for your Internal Assessment (IA), where you can explore how poor financial management led to its downfall.

On the flip side, companies like Tesla have seen their share prices rocket thanks to strong financial strategies and innovative investments. Tesla’s massive stock price surge in recent years has made it a key case study in how financial management can drive a company to new heights.

Using Finance BM Resources to Get a Level 7

This unit is far from boring—it’s an exciting exploration of how Finance shapes the fate of companies. With the right Finance BM resources, including case study questions, profit and loss accounts, and balance sheets, you’ll develop the financial literacy needed to analyze any company, whether it’s on the brink of bankruptcy or ready for explosive growth. Master the content in Unit 3, and you’ll be well on your way to getting a level 7!