A neighbourhood bakery plans to replace an oven costing £18 000. The owner has retained profit from earlier sales, but is also considering a bank loan. The ...
Question 1 Report
A neighbourhood bakery plans to replace an oven costing £18 000. The owner has retained profit from earlier sales, but is also considering a bank loan. The business wants to keep enough cash to buy ingredients and goods for its customers.
(a) State one internal source of finance the bakery could use. [1]
(b) Identify two advantages of using retained profit to buy the oven. [2]
(c) Give two costs that the bakery may face when it uses a bank loan. [2]
Answer Details
(a) Retained profit is an internal source of finance because it has been generated and kept by the business. [1]
(b) Using retained profit means no interest is charged and no loan instalments are required. It also avoids sharing ownership or control with new investors. [2]
(c) A bank loan may involve interest payments and a bank arrangement or administration fee. Costs of providing security may also arise. [2]
Exam reminder: Retained profit has no borrowing cost, but the bakery must still keep enough cash available for ingredients and other day-to-day trading needs.
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