CAIE A-Level Business AS: Finance & Accounting

[Maximum number: 5]

(a)

Define the term trade receivables.

[ 2 ]

(b)

Explain one reason why a business may need finance.

[ 3 ]

Indicative content

Responses may include:

AO1 Knowledge and understanding - 1 mark for identifying one reason why a business may need finance Reasons why a business may need finance include:

- start up a business

- grow/expand the business

- survive

- run the business

- working capital

- buy capital equipment

AO2 Application -2 marks ${ }^{\text {± }}$ for developed explanation of one reason why a business may need finance.

1 mark ${ }^{\Delta^{* *}\text{f}}$ for limited explanation of one reason why a business may need finance.

- start-up finance or capital, purchase assets e.g. premises, equipment, machinery, tools, vehicles

- pay for market research and promotion to develop product and create demand

- need more finance in the early stages before getting established or when facing a crisis

- money to start trading, pay staff wages, utility bills and suppliers on time

- having funds to pay for additional assets, new machinery, new staff, additional raw materials

Accept all valid responses.

[Maximum number: 5]

(a)

Define the term direct cost.

[ 2 ]

(b)

Explain one method of improving cash flow for a business.

[ 3 ]

Explain one method of improving cash flow for a business.

Indicative content

Responses may include:

AO1 Knowledge and understanding

1 mark for identifying one method of improving cash flow for a business

- Overdraft

- Short-term loan, sale of assets

- Sale and leaseback

- Reduce customer credit terms / discounts for early payment

- Debt factoring

- Increase cash inflow

- Decrease cash outflows - delay payments to suppliers (creditors)/obtain discounts

- Delay spending on capital equipment

- Use leasing, cut overheads

- Produce a cash flow forecast

Also accept long-term solutions:

- More motivated staff

- Increased revenue

- Increased productivity

- Improved inventory management

AO2 Application

2 marks for a developed application/explanation of one method of improving cash flow for a business

1 mark for a limited application/explanation of one method of improving cash flow for a business

- An overdraft is where a bank agrees to a business borrowing up to an agreed limit as and when required - therefore increase cash inflow

- A short-term loan allows a fixed amount to be borrowed for an agreed length of time - which increases cash inflow

- Sale of assets allows cash to be obtained from selling off redundant assets - which will boost cash inflow

- Sale and leaseback allows an asset to be sold then leased back - increase cash inflow

- Reduce credit terms to customers i.e. from 2 months to 1 month - will enable cash to be brought into the business sooner

- Debt factoring enables customers' bills to be bought - means an immediate cash boost

- Make more sales - reduce price to encourage customers to buy more, more advertising

- Delay payments to suppliers i.e. pay a bill after 3 months instead of 2 months - cash outflows will fall in short term

- Delay spending on capital equipment - means money is kept in the business that might have gone out

- Use leasing - no large cash outlay is made - so less money going out of the business

- Cut overheads (that do not directly affect output) - i.e. promotion costs - so less money going out of the business

- More motivated staff - make less mistakes so less wastage of materials

- Improved productivity - higher output so potential for higher sales

- Improved inventory management - can free up cash

- Increase revenue - by diversifying

Accept all valid responses.

[Maximum number: 3]

Explain one benefit to RP of using a budget.

Knowledge & understanding	Knowledge of a benefit of using a budget	1 mark
Explanation	Explanation of a benefit to a business of using a budget	1 mark
Context	Context linked to a benefit to RP of using a budget	1 mark

[Maximum number: 15]

Samira's Whiteboards (SW)

Samira left school at the age of 18 in country H . She had a small amount of savings and an idea to create a flexible, removable and reusable whiteboard. Samira created a prototype and received small orders from local retailers.

A local manufacturer batch produces stock when required. There is a two-week lead time for a minimum order of 500 units. Samira started to sell her whiteboards on her website and at trade shows. She has been trading for seven months. She has good cashflow but little working capital as production costs are high.

Samira has heard that OS, a large business that sells office equipment, is planning to sell their own version of Samira's whiteboard. She is keen to increase production quickly to take advantage of being first to market. However, Samira's manufacturer cannot supply enough product to meet the growth in potential demand for whiteboards.

Fig. 1.1 shows an inventory control chart for the first seven months of trade.

Lara, a venture capitalist with experience of manufacturing, has approached Samira about making an investment. She would invest $ 100000 to build a local mass production facility for SW. The facility would have a maximum output of 50000 units per month. Lara wants to own 40% of the business.

(a)

Explain the term working capital.

[ 3 ]

(b)

Evaluate whether Samira should accept Lara's offer to invest venture capital.

[ 12 ]

Indicative content Responses may include:

AO1 Knowledge and understanding

Knowledge of the features of accepting the venture capital offer □ (max 2 marks), including:

- Venture capitalist will invest equity finance in the business/own a share of the business

- Long-term source of finance

- Venture capitalist can offer guidance/advice

- The impact of venture capital on a business ability to grow

- The relationship between sources of finance and business decisions/growth

- The need to choose the correct source of finance for the short and long term business aims/growth potential

- The impact of funding decisions on stakeholders and their reactions

AO2 Application

Context applied to features of accepting the venture capital offer □ (max 2 marks), including:

- Little working capital

- Two-week lead time for a minimum order of 500 units.

- Own website, trade shows and independent retailers

- She has been trading for seven months.

- She has good cashflow but little working capital as production costs are high.

- $ 100000 VC investment into a mass production facility

- A 40% share of the business

AO3 Analysis

Limited analysis □ - candidate shows one link in the chain of analysis.

Developed analysis - candidate shows two or more links in the chain of analysis.

Advantages of venture capital to SW may include:

- SW will have an experienced partner to find solutions to potential problems which may be cheaper than hiring external business consultants, lowering variable costs and increasing efficiency

- SW will have a fixed asset that will be able to accommodate the OS order if the product is successful, which may lower the unit cost and increase future profits

Disadvantages of venture capital to SW may include:

- Reduce net profits in the short term and reduces ownership stake, lead to a reduction in dividend/financial returns

- The mass production facility will need to be built, which will take time;
May lose first mover advantage

- Contribution of the venture capitalists to decision making

AO4 Evaluation

Limited evaluation - unsupported judgement and/or a weak attempt at evaluative comment

Developed evaluation E - supported judgement and/or reasonable evaluative comment Developed evaluation in context ${ }^{[\text {EE }]}$ - supported judgement in context and/or reasonable evaluative comment in context.

- A judgement about whether Samira should accept Lara's offer to invest

- What the judgement might depend upon;
the timeframe that SW must satisfy their order, Samira's appetite for financial risk, the likelihood of the product being successful in the long term,

- Weighing up the arguments for organic growth vs. investment

Accept all valid responses.

Exemplars for awarding evaluation

Figure for Answer to Question (b) — CAIE A-Level Business AS

L1 (limited supporting evidence)	L2 ± (developed supporting evidence)	L3 ${ }^{\text {EE }}$ (developed supporting evidence with context)
Samira should accept Lara's offer	Samira should accept Lara's offer because it means she will have more capital	Samira should accept Lara's offer because it means she will have more capital to build the local mass production facility
No investing venture capital is a bad idea	No investing venture capital is a bad idea because Samira will no longer have sole responsibility for decisions	No investing venture capital is a bad idea because Samira will no longer have sole responsibility for decisions such as whether to continue to sell the whiteboards on her website
In the short-term accepting the venture capital will be unwise.	In the short-term accepting the venture capital will be unwise as Samira will give up part of the ownership of the business.	In the short-term accepting the venture capital will be unwise as Samira will give up 40\% of the ownership of the business.

CAIE A-Level Business AS 5 Finance and Accounting Questions

Covered syllabus points

Knowledge & understanding	Knowledge of working capital	1 mark
Explanation	Explanation of working capital	1 mark
Context	Applied to a business context/ business environment	1 mark

Covered syllabus points

Question 1

Question (a)

Question (b)

Question 2

Question (a)

Question (b)

Question 3

Question 4

Question (a)

Question (b)