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AS / Level – Business (9609) – [Essays] – PAPER 1 AATIK TASNEEM | AS / LEVEL: BUSINESS (9609) | 03041122845 1 SECTION 5 / [7 Essays] (M/J 2018, V3), Q5 (a) Analyse two advantages of venture capital as a source of finance for a small business. [8] This when small companies who cannot raise finance through stock exchange gain long term investment from venture capitalists. These can be organizations or wealthy individuals who take massive risk with a small business. One benefit of using venture capital as a source of finance is that it provides small companies with access to funding, even if they find it difficult to raise capital through traditional means, such as bank loans or public offerings, despite being profitable. Venture capital firms are typically willing to invest in early-stage or high-growth companies that may not yet have a proven track record or significant assets. This can be especially beneficial for startups and innovative businesses that have promising ideas but lack the resources to scale up their operations. By providing funding, venture capital firms can help these companies grow and succeed, ultimately generating returns for both the investors and the entrepreneurs. Another benefit of using venture capital as a source of finance is the additional support and expertise that venture capitalists can provide. In addition to funding, venture capitalists often offer valuable advice, guidance, and consultation to the companies they invest in. This can be particularly beneficial for startups and early-stage companies that may lack experience in areas such as financial management, strategic planning and business networks. Venture capitalists provide extensive networks of contacts in various industries and suppliers, which can help companies access new markets, partnerships, and opportunities for growth. By leveraging the knowledge and experience of venture capitalists, entrepreneurs can make more informed decisions and avoid common pitfalls, ultimately increasing their chances of success by reducing costs and increasing profitability which can be reinvested to sustain future growth.
AS / Level – Business (9609) – [Essays] – PAPER 1 AATIK TASNEEM | AS / LEVEL: BUSINESS (9609) | 03041122845 2 (M/J 2021, V3), Q7 (a) Analyse two benefits to an entrepreneur of using micro-finance as a source of start-up capital. [8] Micro finance is providing financial services for poor and low-income customers who do not have access to banking services, such as loans and overdrafts offered by traditional commercial banks. One benefit of using microfinance as a source of startup capital for a business is the access to funding it provides, especially when traditional lenders are unwilling to lend to small businesses seen as higher risk. Microfinance institutions are often more willing to take on this risk and provide loans to entrepreneurs who may not have access to traditional financing options. This can be particularly advantageous for startups that have innovative ideas or are operating in industries that are perceived as risky by traditional lenders. This leads to the business getting the required capital that it requires to get off the ground and can develop their products or services. This opens opportunities for these businesses to secure more funding in the future once sales flow in leading to an increase in future growth opportunities. Another benefit of using microfinance as a source of startup capital for a business is the relatively small loan amounts, which can make debt repayment easier and faster compared to larger loans. Microfinance institutions typically provide loans in smaller denominations that are more manageable for entrepreneurs, especially those with limited financial resources. This can help businesses meet their financial obligations more efficiently, as they are not burdened with large debt repayments that can strain their cash flow. This shorter repayment periods often associated with microfinance loans can help businesses repay their debts quickly, allowing them to focus on growing their operations and generating profits which can be reinvested in the business to hire better labor or to develop better quality products resulting in building long-term competitive advantage over competitive firms.
AS / Level – Business (9609) – [Essays] – PAPER 1 AATIK TASNEEM | AS / LEVEL: BUSINESS (9609) | 03041122845 3 (M/J 2023, V3), Q5 (a) Analyse two purposes of a cash flow forecast for a business. [8] A cash flow forecast is the estimate of a firm’s future cash inflows and outflows. The aim is to improve financial planning. It helps the identify negative cash flows to gain external finance. One benefit of creating a cash flow forecast for a business is its ability to provide a detailed projection of future cash inflows and outflows. This forecast helps businesses to identify potential shortfalls in cash that may arise from periods of low revenue or unexpected expenses. By recognizing these challenges in advance, businesses can take proactive measures to manage their cash flow effectively. For example, if a cash flow forecast indicates that there may be insufficient cash to meet day-to-day needs without arranging an overdraft, the business can approach a bank in advance to secure a suitable overdraft facility. This proactive approach allows the business to address potential liquidity problems before they occur, ensuring that it can continue to operate smoothly and meet its financial obligations, such as paying suppliers, wages, and utility bills, on time. Another benefit of making a cash flow forecast for a business is the ability to assess whether the business is meeting its financial objectives, which helps keep shareholders satisfied. By comparing actual cash flow data with forecasted figures, businesses can evaluate their financial performance and determine if they are on track to achieve their goals. If the forecast shows that the business is not meeting its financial objectives, management can take corrective actions, such as reducing expenses or increasing sales, to improve performance. This proactive approach demonstrates to shareholders that the business is actively monitoring its financial health and taking steps to ensure their investment is being managed effectively, which can help maintain shareholder confidence and satisfaction. This leads to more investment and assist the business to retain these investors which is crucial to future growth plans.
AS / Level – Business (9609) – [Essays] – PAPER 1 AATIK TASNEEM | AS / LEVEL: BUSINESS (9609) | 03041122845 4 (O/N 2013), Q5 (b) ‘Sale of assets is the best way to solve the cash flow problem for a car manufacturer’. Evaluate this view. [12] A cash flow problem is a situation where the cash inflows are less than the outflows. It mainly occurs because of poor management, not being able to acquire a large startup capital, or due to inability to earn enough sales. Sale of assets has can help solve cash flow problems for a car manufacturer by providing an infusion of cash that can be used to cover immediate financial obligations or invest in areas that can generate future revenue. Since a car manufacturing companies are generally large, they can sell out dated assembly line equipment or factory land which is not under use. This results in the manufacturer to quickly raise funds without taking on additional debt while also potentially improving its overall financial health by increasing liquidity. Additionally, selling underperforming assets and streamline operations and reduce costs. The combination of reduce costs and higher revenue tends to generate more cash inflow. These surplus cash earning allows them to reinvest them to build better cars and upgrade the assembly lines with new machines and expand the factories which helps them to ensure a stable cash flow and removes the problem. [However] selling off assets such as manufacturing equipment, land, or facilities can reduce the company's capacity to produce vehicles. Car manufacturing is a capital-intensive business and a small delay in the production lines can damage the entire output potential. Failure to have machinery would result in cars not being delivered on time which and lead to dissatisfied customers. As a result, some might switch to rival brands whereas other might cancel their bookings. This results in damaging the brand name which reduces sales further decreasing their revenue which can potentially add to more cash flow problems in the long-run. [EVAL] Therefore selling assets adds instantly to cash without adding any form of debt. However, this depends on the size of the car manufacturer. Only large and well-established car manufacturers have extra land and machinery to sell and still continue operations. For new car manufacturers this method is not possible since they are already struggling to build and expand capacity and are purchasing land and machinery to grow their productions lines. Along with sale of assets a car manufacturer can use bank loans. One significant benefit of using bank loans to address cash flow challenges for a car manufacturer is the ability to access a large sum of capital quickly. Since banks offer substantial loan amounts, allowing manufacturers to cover immediate expenses such as raw materials like car parts, production costs like paying the assembly line workers and designers, and overheads expenses like factory rent and advertising. This influx of capital can help stabilize operations, maintain production schedules, and fulfill orders, ultimately preventing disruptions in the supply chain. Once the business starts to generate cash, they flexibly repay the amount enabling manufacturers to manage their financial obligations more effectively during periods of fluctuating cash flow. This ensures uninterrupted production and higher sales potential that prevents future cash flow problems. [However] using bank loans to address cash flow issues for a car manufacturer comes with the obligation to repay the loan with interest. The automotive industry is known for its cyclical nature, with demand influenced by various factors such as economic conditions, consumer preferences, and technological advancements. During downturns, when sales and revenues may be lower, repaying a substantial loan with added interest can strain financial resources. This added financial burden can limit the manufacturer's ability to invest in innovation, research, and development, which are crucial for staying competitive in the rapidly evolving automotive market. This limits sales even more and can enhance the cash flow problem. [EVAL] Therefore along with sale of assets the car manufacturer can use bank loans due to the ease and speed of getting the finance. However, this depends on how accurately can the car manufacturer forecast future cash flows. Since the automotive industry is subject to various external factors that can impact sales, such as economic conditions, consumer trends, and regulatory changes therefore without a robust understanding of its market and the factors influencing it to predict future cash inflows accurately it would be difficult to determine the appropriate loan amount needed and to develop a repayment plan that aligns with its cash flow projections, ensuring that the loan can be repaid without further straining the company's finances.