Practise distinguishing internal from external finance and analysing the advantages and disadvantages of grants, overdrafts, retained earnings, trade credit, equity and loans.
Festival Wear (FW)
FW is a partnership started by two friends, Maz and Jane. FW manufactures and sells high quality T-shirts at $ 40 each. The business can manufacture 35000 T-shirts per month using mass customisation. The T-shirts are only sold at music festivals and concerts and are customised to each event. FW has never advertised the T-shirts, relying on a sales team to attend a festival or concert and personally sell the T-shirts.
Current costs:
- variable: $ 10 per T-shirt
- fixed: $ 200000 per month.
Sales average 27000 T-shirts per month. Currently the sales team is paid a monthly salary, but Maz is proposing a new payment method in order to increase sales volume. This will mean a lower monthly salary but a commission of $ 2 per T-shirt will be paid. Maz estimates that sales volume would increase to 30000 per month.
Costs if the new payment method is introduced:
- variable: $ 12 per T-shirt
- fixed: $ 182000 per month.
Analyse two external sources of finance that FW could use to invest in new machinery.
Analyse two external sources of finance that FW could use to invest in new machinery.
2(c)
Indicative content
AO1 Knowledge and understanding
Knowledge of an external source of finance (max 2 marks - annotate first source on left and second source on right), including:
- bank loan
- another partner
- convert to a limited company
- venture capital
- leasing
- hire purchase
- bank loans
- mortgages
- debt factoring
- trade credit
- micro-finance
- crowd funding
- government grant
AO2 Application
Context applied to an external source of finance (max 2 marks), including:
- $4 m needed
- Low break-even so good contribution to help get a loan
- Good business attractive to shareholders
- Required for expansion
- New product could be risky
- Market research needed to assess viability
- Partnership
2(c)
AO3 Analysis
Analysis of a relevant external sources of finance, including:
Limited analysis - candidate shows one link in the chain of analysis.
Developed analysis candidate shows two or more links in the chain of analysis or a two-sided analysis.
- Long term loan may be suitable - would banks lend to a partnership?
- Venture capitalist will want quick returns - so less time to make returns
- Probably no debts to factor - so unavailable source
- Government grant unlikely - unless help available to help (small) businesses to expand
- Too much for micro-finance
- Loss of ownership if convert - danger of takeover
- Effect on liquidity - depending on length of time involved
- Cost of finance - could be high interest rates
Note: Analysis must relate to a suitable source for financing machinery. For example, a mortgage is an external source so would get a K mark but not realistic for financing machinery unless linked by, e.g. saying a mortgage on the factory building to get finance to purchase the machinery.
Accept all valid responses.