Fig. 1 shows a finance route considered by a new business selling refillable household-cleaning products. The owner wants to avoid borrowing while the busin...
Question 1 Report
Fig. 1 shows a finance route considered by a new business selling refillable household-cleaning products. The owner wants to avoid borrowing while the business is still building a customer base.
(a) What is meant by retained profit in this business? [2]
(b) Identify the source of finance shown at the final stage of Fig. 1. [1]
(c) Explain one disadvantage of relying only on this source when demand increases quickly. [2]
Answer Details
(a) Retained profit is profit made by the business that is kept in the business rather than taken by the owner or paid out. It can then be used, here, to buy new stock. [2]
(b) The finance source at the final stage is retained profit. [1]
(c) Retained profit depends on profit earned in the past. If demand rises quickly, the business may not have enough retained profit available to buy sufficient new stock quickly, which could limit sales. [2]
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