Business management

Higher level
Paper 2 2020
Study online at https://quizlet.com/_9qyb4c
Features include:
Easy to set up - no legal formalities
Owner has complete control - not answerable to anyone else
Owner keeps all profits
Able to choose times and patterns of working
Able to establish close personal relationships with staff (if any are
employed) and customers
The business can be based on the interests or skills of the owner
- rather than
working as an employee for a larger firm
(a) State two features of a sole trader. [2]
Unlimited liability - all of owner's assets are potentially at risk
Often faces intense competition from bigger firms, e.g. food
retailing
Owner is unable to specialise in areas of the business that are
most
interesting - is responsible for all aspects of management
Difficult to raise additional capital
Long hours often necessary to make business pay
Lack of continuity - as the business does not have separate legal
status, when the owner dies the business ends too
Budgeted figure ($) Actual figure ($)
Sales revenues 5000 4000
Cost of goods sold 3000 2500
(b) Using information in Table 1, for JJ, prepare: Gross profit 2000 1500
(i) a profit and loss account for the budgeted figures and the actual Expenses 1000 800
figures (show all your working); [3] Net profit 1000 700
(ii) a variance analysis (show all your working). [3]

Budgeted figure ($) Actual figure ($) Variance

Sales revenues 5000 4000 1000 adverse
Cost of goods sold 3000 2500 500 favourable
Gross profit 2000 1500 500 adverse
(c) Explain one possible economy of scale from which JJ has Expenses/overheads 1000 800 200 favourable
benefitted. [2] Net profit 1000 700 300 adverse

Working capital cycle is the period of time/interval between the

actual cash paid for costs of production and the actual cash
received from customers. It is the time period when net current
assets is converted into cash. [2]

(a) Define the term working capital cycle. [2]

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 Business management
Higher level
Paper 2 2020
Study online at https://quizlet.com/_9qyb4c

(b) Prepare a monthly cash flow forecast for BB for the first four
months of operation. [6]

It is expected that candidates identify the main figures/categories

that contributed
to the negative cash flow. Clearly the options are either to reduce
the cash outflow or increase the cash inflow. Candidates should
provide concrete
examples as application. There is no need to reproduce a new
cash flow. It is expected the relevant terminology is used. As
generally total revenue is
increasing, apart from February, it is not expected that candidates
suggest to increase total revenue inflow using marketing etc.
Increase inflows:
Candidates may suggest that BB should not give credit for the first
months of operation. This will increase the inflow by a $1000.
Dan can possibly ask the bank to give a loan in the first months
of operation instead of the 4th months. $3000 will help BB to
significantly reduce the initial
negative cash flow.
(c) Explain one strategy that BB could use to significantly improve
Increasing the price of benches will increase inflows. However, this
its forecasted cash flow for January 2021. [2]
may reduce competitiveness.
Reduce outflows:
Dan can reduce his own salary of 1500, especially in the first
month or so. Own salaries and admin are the most excessive/large
outflow that contributes to the
negative cash inflow. A smaller self-reward can significantly re-
duce the outflow and therefore the net cash flow.
Dan can also negotiate his rental payments. Instead of paying a
large sum of 1200 in January, monthly installments of $400 will
significantly reduce the outflow
in January Dan can also ask for at least one month's credit from
his landlord.
Do not accept an option of not buying the machinery/tools.
Accept lease the machinery for a considerably lower fee per
months.
Generic comments like reduce donation, utilities etc will not make
a significant impact. Hence not really applicable.
One feature of a private limited company is that
The number of shareholders may be limited to 20 depending on
the country in which the business is owned.
Shareholders have to be invited to join the board of directors as
shares cannot
be advertised
Owners of the business will enjoy limited liability, which indicates
(a) Describe one feature of a private limited company. [2]
that if a business experiences a financial collapse then the owners
will only be liable
for the capital contributed.
There is normally no legal requirement to publish detailed finan-
cial accounts for the public or provide quarterly forecasts to an
exchange or supervisory
committee unless it is for corporate tax purposes.

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 Business management
Higher level
Paper 2 2020
Study online at https://quizlet.com/_9qyb4c
Theoretical answer - award [1] for each advantage and disadvan-
tage:
A mission statement allows a business to state its current purpose
and can be
used to position the organisation in the minds of its stakeholders.
It can be a motivating force for employees and also provide a
(b) Explain one advantage and one disadvantage for MC of having goal/purpose
a mission statement. [4] which potential investors may be attracted to
However, some mission statements can only provide a vague goal
or objective and a mission statement does not indicate how this
objective will be achieved
which could make them misleading or have little value.
Focussed mission statements do require management time and
resources to be effective.
Theoretical advantage and disadvantage - award [1] for each.
Advantages:
. Venture capital provides the company with an opportunity to
expand. This would
not have been possible through other methods like bank loans.
Bank loans
require collateral and there is an obligation to repay the loan.
However, in
venture capital, the investors themselves are ready to take the risk
as they believe
in the company's long-term success. Therefore, venture capital
financing is
beneficial for start-ups with high initial cost and limited operating
history.
Venture capitalists are often people with significant experience in
their respective
industries and this can be extremely helpful for those starting out
in these industries.
They can help with building strategies, technical assistance, re-
sources, etc. in order
to make a business successful.
Venture capitalists have a huge network of connections in the
(c) Explain one advantage and one disadvantage for MC of using business community.
venture capital to provide financial support. [4] These connections could be advantageous for the start-ups to
grow and become
successful. They can help the start-up to enter into alliances with
potential customers
or business houses.
Disadvantages:
Venture capitalist provides huge capital to the start-ups in return
for a stake in the
equity of the company. If the start-up succeeds, then it helps them
earn tremendous
amounts of profit. VC's usually become a part of the Board. They
actively participate
in the company's decision-making. VC's will want to protect their
investments. If there
is a difference of opinion between the VC and the start-up founder,
then things can get
chaotic. Any major decision requires the consent of investors.
A venture capitalist may decide to redeem the investment within
3 to 5 years. Their primary
focus is to earn capital gains. Venture capital may not be suitable
for an entrepreneur whose
business plan will take a longer time to provide liquidity.
Venture capital investors are taking high risks, hence take time in

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 Business management
Higher level
Paper 2 2020
Study online at https://quizlet.com/_9qyb4c
making decisions to invest.
It can therefore be a lengthy process and not suitable when quick
funding required.
There is a considerable tension between the need for financial
sustainability outlined in the stimulus and the table and a violation
of the mission statement if
they decide to go ahead with the concert. There is no quick fix to
MC's problems.
The financial figures provide some ammunition for evaluation both
positively and negatively. Musicology's solvency is at risk if they
do nothing. But if they host the
concert, they will use up valuable resources and the CEO doubts
that the business will be able to cope. There is a forecast profit of
24million but what if
budgets are exceeded or forecasts not met? Musicology is going
beyond its normal operational ability and costs will be difficult to
forecast. Even with pay per view it will be difficult to judge how
many will actually pay.
Musicology is being kept "alive by venture capital". Will other
potential investors
tolerate a concert where musicians do not play real instruments?
The mission statement is at risk and the gearing ratio is currently
75 %. They will not be able
to borrow their way out of any financial difficulties.
A great deal of trust is being placed in Abbi. Her confidence may
be a positive thing, but can MC have faith in her social media
(d) Discuss whether MC should organize the live concert. [10] connections? It can be very
difficult to measure exactly how many people will be willing to
pay. Cash flow forecasting at a time of variable cash inflows and
outflows may be very hard to
do.
However, the global concert will spread the mission of MC. The
reach could be considerable and new investors will probably come
forward. The pay for view and sponsorship from the musical in-
strument manufacturers will offset revenue lost to
illegal downloaded sites. If this concert goes well the future ben-
efits to MC could be considerable. There may be future concerts
and or other extension strategy
possibilities. Angel investors may see the ethical approach MC is
taking and bring forth newer investors reducing the dependence
on venture capitalists.
It would seem that if MC wish to remain economically sustainable
the concert will have to proceed. It is a risky strategy but one which
could have longer term
benefits if the exposure of the business via the pay per view model
to a global audience generates significant funds and publicity.
Abbie seems confident and
well connected and this is important for MC who do most of
their promotion and brand building through the internet and social
media.
A unique selling point is any aspect of the organization, brand
(a) Define the term unique selling point/proposition (USP). [2] or product that enables differentiation in consumers' minds from
competitors.
People and process are two out of the three extended marketing
mix which that
are highly relevant for an organisation that operates in the service
sector like EI.
The stimulus refers to people, in this case the employees, who are
highly motived, skills, committed and interested. They serve the

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 Business management
Higher level
Paper 2 2020
Study online at https://quizlet.com/_9qyb4c
customers efficiently
and interact well with the customers. The characteristics of the
employees enhance the lack of some tangibility of the service on
top of the actual ice cream
of EI. People help to create USP.
Candidates can refer to the daughter as people, who are success-
fully searching and finding exotics flavours to enhance customers'
satisfaction and create a
USP. Do not penalize if candidates refer to employees or staff
instead of 'people'
Processes
(b) Explain the importance of people and processes in EI's ex- The employees of EI do not only serve the ice cream but con-
tended marketing mix. [4] stantly interact with those who wish to create their own flavours.
Creative freedom and professional
employees' support enable customers to try and create their own
flavour. This adds significantly to the quality of their experience
and is the basis for EI's USP.
The opportunities given for creativity and testing, enhances cus-
tomers experience and as stated, create a USP/ clear basis for
differentiation.
Candidates can also refer to the process of serving customers
efficiently.
However, the long queues reported also suggest that process is
not always efficient.
groups to gain insight into and information about opinion, attitudes
and behaviour
of the respondents.
The possible advantages:
Lena's daughter can engage in meaningful discussion with the
participants and
ask probing questions regarding their willingness/ motivation to
open an EI's
franchise, their expectations, experience, reservations and so on.
Lena should be
more aware of the support that might be needed to ensure that the
brand is not
damage. A thorough research using a focus group can reduce the
risk of failure.
Asking local entrepreneurs may be a good starting point to get
some initial
responses about the level of interests, motivation, expectations,
(c) Explain one advantage and one disadvantage for EI of using
reservations and
a focus group. [4]
so on before a major strategic decision is made.
However:
The use of local entrepreneurs is unlikely to provide the right
sample as EI is
interested in local as well as national franchising. Moreover, local
entrepreneurs
are more likely to presume their own business ideas rather than
using EI's. The
sampling/targeted group can be seen as inappropriate and might
give Lena
inappropriate information.
One may doubt Lena's daughter ability to conduct a focus group.
She has no
qualification and experience as she travels the world to find exotic
flavours. Lack
of knowledge and experience can result in inappropriate/ leading
questions and

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 Business management
Higher level
Paper 2 2020
Study online at https://quizlet.com/_9qyb4c
hence inappropriate information for Lena to base her decision
upon.
Option 1: Internal growth - Issuing shares to open eight shops
locally and
nationally
By reducing her holding to 51 % Lena can potentially raise enough
capital for EI
to pursue the organic internal growth option.
Pursuing an internal growth strategy, the nature and the pace of
the growth can
be fully controlled by Lena/the family especially in the short run.
Lena will have
full control of the process and the future operation of all of the
shops as Lena/the
family will still have the majority shares to retain the much-desired
ownership,
power, control and to make a major strategic decision. The collab-
orative culture
of EI will be maintained. These issues are of high importance for
the current
owner.
Still Lena will have to get some approval of other shareholders.
One may judge
this argument as less significant in the short run as the family will
have the
controlling interest in the business. In addition the only other
shareholders are her
daughters
Still, if EI is to grow further, more shares will have to be issued and
Lena and the
(d) Recommend which of the two strategic growth options, Option family control will be eroded as it only takes 2 % for the family to
1 or Option 2, EI should implement. [10] lose control.
Still, as shares are only sold to friends and family, one may judge
this issue as
less significant.
EI might also not raise all of the desired finance but this is unlikely
as the targeted
growth of 8 shops does not seem over ambitious.
Having more shareholders might generate useful strategic input
but it appears
that Lena is not after shareholders inputs/ involvement - only
finance.
However, internal growth is a slower process than franchising and
Lena is
worried about the queues forming and its potential negative im-
pact on the brand.
N.B do not credit candidates that wrongly assume shares can be
sold publicly on
a stock market - this is a Private Limited Company.
Option 2: Franchising - External growth/Non-organic growth
Some of the arguments in favour:
The issue of ownership of the business is of no significance. No
ownership will be
lost.
One may argue EI will be able to expand further with 50 outlets
over 5 years. This
growth is a much more significant growth and enables EI to build
on its strong
brand name and enable the brand to spread quickly throughout
the country. The

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Business management
Higher level
Paper 2 2020
Study online at https://quizlet.com/_9qyb4c
issue of the queues and its potential negative impact perhaps be
solved quicker.
Moreover, a success might attract other franchises.
EI will receive royalty regardless if the franchise is making a profit
or not.
However, this is not really a n important argument as the motiva-
tion is not
financial.
However, this method of growth relies on the skills, motivation, the
quality of
management of the franchises.
- 17 - N20/3/BUSMT/HP2/ENG/TZ0/XX/M
Despite some damage to EI's USP if the franchisees do not follow
the exact
concept, Lena can terminate the agreement after few years. Still,
some of
potential damage to EI's current strong brand/USP may be difficult
to correct. It is
however less likely as market research revealed that there are
interested
franchisees.
Still EI's USP cannot be protected and franchises can get expe-
rience and support
from EI and start a similar business in the medium term. One may
judge this
argument as a very significant one as it is easy to open an ice
cream shop, it is
more difficult to come up and implement EI processes that can be
copied.
EI will have to spend money on training costs and to ensure that
the same
ingredients are sold to each of the franchises.to ensure consis-
tency and high
standards. El is currently a 'local' brand. If franchising is to go
'national' then
investment in the brand name will be needed.
Control will be remained in the family but EI will have to ensure
that each
franchisee adheres fully to EI's format. Poor service as well as
poor quality ice
cream will result in a major damage to the brand name.
Types of external growth include:
Mergers
Acquisitions
(a) State two types of external growth. [2]
Strategic alliances
Joint ventures
Franchising
Taylor's motivation theory will clearly have advantages for FI.
Advantages:
Setting 'specific targets' enhances production levels for FI
Having 'close monitoring' enables better control for FI
Due to the 'close monitoring' quality standards can be maintained
and
errors reduced
Limited consultation enables quicker decisions by management
Careful planning of tasks allow optimal use of resources for FI.
Disadvantages:
The need to 'monitor closely' requires more management/super-
visory
time
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 Business management
Higher level
Paper 2 2020
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Reducing all tasks to fixed routines reduces flexibility
Using Taylor does not allow team working which might otherwise
give
efficiency benefits
Does not encourage creativity and new ideas for production meth-
(b) Explain one advantage and one disadvantage for FI of moti- ods
vating its employees using Taylor's motivation theory. [4] There is clearly potential stress under this motivational regime.
Pressure
to perform and meet international quality and safety standards.
This could
be demotivating for some workers and it could increase staff
turnover at FI.
When FI became a public company, Jacques's situation changed.
As a largely autocratic leader, he had not ever had to explain his
decisions to anyone. He was
in control. Now that he is the head of a public limited company with
many
shareholders, he had to explain his decisions to a board of direc-
tors that he had not personally selected.

As head of a privately held company, Jacques could use company

resources as
he saw fit. If he made a poor decision and it hurt the finances of
the company, he
(c) Explain two reasons why Jacques may have found the transi-
was only hurting himself. Now, as head of a publicly traded com-
tion difficult when FI became a public limited company. [4]
pany, he has a fiduciary responsibility with the resources of the
company. All resources should
be used judiciously with the aim of improving the return to share-
holders.
As a public limited company, FI was subject to greater media
scrutiny, which meant that any issue or problem was potentially
subject to public viewing through the press. Jacques had always
valued privacy. He largely controlled what
information got to the press. Now as head of a publicly traded
company, FI had to adopt an aggressive public relations strategy
as a way to minimize informational
risk and maximize shareholder value.
The advantages of long-term debt are that FI gets money now and
the repayment
is over many years. Ownership is not affected by long-term debt,
and, for a company as old and established as FI, financing from
banks or other financial
institutions would probably not be that hard to obtain.
The disadvantages of long-term debt are that interests costs will
rise, which increases outflows and liquidity will decrease. Addi-
tionally, the bank may put
some restrictions on FI in the loan agreement which might limit
future liquidity
(d) Recommend whether Henri should choose Option 1 or Option
solutions in the future.
2. [10]
The alternative method, issuing and selling additional shares of
stock, has the advantage that it would raise equity, which has no
interest payments. Thus, FI
could raise money and invest it in current assets such that it could
start taking
trade and other discounts. Liquidity through increased cash inflow
would improve.
The main disadvantage is that the ownership of FI would be
diluted. The Fort
family would own a lesser percentage of the company than they
currently do.
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Business management
Higher level
Paper 2 2020
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Further, with greater equity, return on capital employed ratios
would probably initially go down. Stakeholders will be concerned
by this perceived fall in
profitability.
Any other strategies probably would not be appropriate or enough
to fix the
problems. Tinkering around with the composition of current assets
is unlikely to
make much of a difference. Presumably, FI turns its inventory as
fast it can.
Making debtors pay more quickly is not very likely to occur, as they
will resist.
This move could give FI's competitors a competitive advantage if
competitors do not alter payment terms.

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