Azeem is a sole trader who runs a mobile bicycle-repair business. He has been offered a contract to repair bikes for a delivery company. The contract would ...
Question 1 Report
Azeem is a sole trader who runs a mobile bicycle-repair business. He has been offered a contract to repair bikes for a delivery company. The contract would give regular revenue, but it requires him to buy diagnostic equipment before payment is received. Azeem's current objective is survival because his cash balance is low after buying a van. His friend says the new contract is the best option because it could increase profit. Azeem is not sure whether growth, profit or cash flow should be his main objective. He also wants to keep existing customers satisfied, as they provide most of his regular work.
(a) Define cash flow. [1]
(b) State three possible business objectives, other than survival, that Azeem could use. [3]
(c) Analyse how the contract could improve Azeem's profit objective but create a cash-flow problem. [4]
(d) Assess whether Azeem should accept the delivery-company contract. [6]
Answer Details
(a) Cash flow is the movement of cash into and out of a business. [1 mark]
(b) Three possible objectives, apart from survival, are profit maximisation, growth or increased sales, and increased market share. Customer satisfaction, employee welfare, and social or environmental objectives are also valid. [3 marks]
(c) The contract would provide regular repair revenue, increasing total revenue. If this revenue is greater than repair costs, Azeem's profit will rise. However, he must pay for diagnostic equipment before receiving contract income. Therefore cash outflows may exceed cash inflows in the short term, causing a cash-flow problem despite the prospect of profit. [4 marks]
(d) Accepting could provide regular, predictable work and support long-term survival. More jobs may spread fixed costs, such as the van and labour, across more repairs, and higher profit could fund growth. Against this, Azeem already has low cash, so buying equipment creates an immediate outflow. If the delivery company pays late, he may struggle to pay fuel, wages or suppliers. Limited capacity could also reduce service for existing customers, who provide regular work. A sound judgement is to accept only if he can arrange credit, a customer deposit, or favourable payment terms; otherwise he should decline because immediate liquidity is essential for survival. [6 marks]
Download The App On Google Playstore
Everything you need to excel in your exams
