The following business case concerns Rojaz, who runs a small alterations service from a shared studio. Demand has increased after local theatre groups used ...
Question 1 Report
The following business case concerns Rojaz, who runs a small alterations service from a shared studio. Demand has increased after local theatre groups used her service. Rojaz wants to move to a larger unit and sell ready-made costumes to a new market. The move, machines and opening stock will cost £27 500. She has £11 000 cash from retained profit. Her options are to use all of this cash, ask her aunt for a loan of £8 000, or take a bank loan for the full amount needed. The bank loan would be repaid over four years and would include interest. Rojaz wants to select a source of finance that allows the business to keep enough cash for monthly bills.
(a) Calculate the amount of finance Rojaz needs after using her retained profit. Show your working. [2]
(b) State one advantage to Rojaz of using retained profit to finance the expansion. [2]
(c) Analyse one possible disadvantage of using a bank loan for the business. [3]
(d) Discuss which source of finance Rojaz should select. Justify your answer. [3]
Answer Details
(a) Finance needed after retained profit is:
\[£27\,500-£11\,000=£16\,500\]
Rojaz needs £16,500 after using all retained profit. [2]
(b) Retained profit has no interest charge, so more money can be available for costume materials or monthly bills [2]. It also avoids loan repayments and allows Rojaz to retain ownership and control.
(c) A bank loan includes interest, increasing the total cost of the expansion [1]. Regular repayments then reduce cash available each month [1]. If sales are low, this may make it difficult to pay rent or suppliers, creating a cash-flow problem [1]. [3]
(d) A bank loan can provide the full £16,500 needed [1], but interest and fixed repayments may put pressure on cash flow [1]. An £8,000 loan from her aunt would be insufficient after retained profit, leaving \(£16,500-£8,000=£8,500\) still unfunded [1]. A justified choice is to use some retained profit and obtain a bank loan for the remaining amount, while retaining enough cash for monthly bills [1]. This meets the funding need but recognises that cash flow, not simply the total cost, is crucial. [3]
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