The following case study shows a new finance decision by Harbour Bean, a mobile coffee business. Its owner sells drinks and packaged products from a convert...
Question 1 Report
The following case study shows a new finance decision by Harbour Bean, a mobile coffee business. Its owner sells drinks and packaged products from a converted van at a coastal market. Customers have asked for card payments and a larger choice of chilled products. The owner plans to replace the van with a newer vehicle costing £96 000. Fig. 1 shows the business using the current van at the market.
Harbour Bean has retained profit of £18 000 from the last year. A bank has offered a five-year loan at 7% interest. Alternatively, a vehicle-leasing company will provide the new van for monthly payments, but the business would not own it at the end of the agreement. The owner wants to protect cash for buying stock and paying staff. Sales are seasonal, so income is lower during winter. The owner is considering each option before selecting the source of finance.
(a) State the term used for money kept in a business from profit after costs have been paid. [2]
(b) Describe one reason why the new van is capital expenditure rather than revenue expenditure. [3]
(c) Explain two possible benefits to Harbour Bean of using leasing instead of paying the full £96 000 immediately. [4]
(d) Calculate the amount of the van cost that cannot be paid from the retained profit. Show your working. [5]
(e) Explain which one of the following options is most suitable for Harbour Bean: use retained profit only, take the bank loan, or lease the van. Use information from the case study in your answer. [6]
Answer Details
(a) Retained profit, also called reserves, is profit kept in the business for future use or reinvestment. [2]
(b) The van is capital expenditure because it is a long-term fixed asset used by the business for several years. It is not an everyday running cost and should help generate sales over more than one accounting period. Any three. [3]
(c) Leasing avoids paying £96 000 immediately, leaving cash for stock, wages and operating costs. [2] Regular monthly payments may make budgeting easier than finding the full amount at once. [2] It also lets Harbour Bean use a newer van without owning it and may make upgrading easier at the end of the agreement. Any two developed benefits. [4]
(d) The funding gap is:
\[£96\,000-£18\,000=£78\,000\]
[5]
(e) Leasing is suitable because it preserves cash for stock and staff while allowing use of the new van. [1] Monthly payments may be easier to manage with seasonal sales [1], and leasing avoids the large £78 000 gap after retained profit is used. [1] A limitation is that Harbour Bean will not own the van at the end and total payments may be high. [1] A bank loan remains possible because the business would own the vehicle after repayment. [1] Overall, leasing is justified by the need to protect cash and manage low winter income. [1] [6]
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