At the start of a weekend market season, Aisha set up a stall selling refillable household products. She put $750 of her own money into the business and bor...
Question 1 Report
At the start of a weekend market season, Aisha set up a stall selling refillable household products. She put $750 of her own money into the business and borrowed $1800 from a community bank. Her sales have grown, but she must buy containers and cleaning products before receiving payment from two local cafés. Aisha is reviewing the finance used to start the business and the effect on cash available.
(a) Which source of finance did Aisha provide herself? [1]
(b) Identify one reason why a business might use a bank loan rather than all of the owner's savings. [2]
(c) Explain one way that cafés paying the business later could affect its liquidity. [3]
(d) What action could Aisha take to improve the cash position of the business in the short term? [2]
Answer Details
(a) The finance Aisha provided herself was owner's capital, also called personal savings. [1]
(b) A bank loan can provide a larger amount of start-up finance than the owner has in savings. [1] Loan repayments can also be spread over time. [1] Other valid reasons are that the owner keeps savings for personal use and does not have to give another owner a share of the business.
(c) The cafés may have received products, so Aisha has made sales, but she has not yet received the cash. [1] She still needs to pay suppliers for containers and cleaning products. [1] Consequently, she may not have enough cash to meet short-term costs, so liquidity falls. [1]
(d) Aisha could ask cafés to pay sooner by reducing the credit period. [1] She could also request a deposit or part-payment when an order is made. [1] Delaying non-essential spending, using an overdraft, or negotiating longer credit from suppliers would also be valid short-term actions.
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