A-Level Applied Business

A-Level Applied Business BS03 Financial Planning and Monitoring Final Mark Scheme 8610 June 2017 Version/Stage: v1.0

Mark schemes are prepared by the Lead Writer and considered, together with the relevant questions, by a panel of subject teachers. This mark scheme includes any amendments made at the standardisation events which all associates participate in and is the scheme which was used by them in this examination. The standardisation process ensures that the mark scheme covers the students responses to questions and that every associate understands and applies it in the same correct way. As preparation for standardisation each associate analyses a number of students scripts. Alternative answers not already covered by the mark scheme are discussed and legislated for. If, after the standardisation process, associates encounter unusual answers which have not been raised they are required to refer these to the Lead Writer. It must be stressed that a mark scheme is a working document, in many cases further developed and expanded on the basis of students reactions to a particular paper. Assumptions about future mark schemes on the basis of one year s document should be avoided; whilst the guiding principles of assessment remain constant, details will change, depending on the content of a particular examination paper. Further copies of this mark scheme are available from aqa.org.uk Copyright 2017 AQA and its licensors. All rights reserved. AQA retains the copyright on all its publications. However, registered schools/colleges for AQA are permitted to copy material from this booklet for their own internal use, with the following important exception: AQA cannot give permission to schools/colleges to photocopy any material that is acknowledged to a third party even for internal use within the centre.

ADDITIONAL GUIDANCE FOR MARKING SCHEME s The s represent those qualities which can be demonstrated in students work and which can be measured for the purposes of assessment. AO1 Knowledge, skills and understanding Students demonstrate knowledge and understanding of the specified content and relevant business skills. AO2 Application of knowledge, skills and understanding Students apply knowledge and understanding of the specified content and relevant business skills. AO3 Research and analysis AO4 Evaluation Quality of Written Communication Students use appropriate methods in order to obtain and select information from a range of sources to analyse business problems. Students evaluate evidence to reach reasoned judgements. The quality of written communication is assessed in all assessment units where students are required to produce extended written material. Students will be assessed according to their ability to: select and use a form and style of writing appropriate to purpose and complex subject matter organise relevant information clearly and coherently, using specialist vocabulary when appropriate ensure that text is legible, and that spelling, grammar and punctuation are accurate, so that meaning is clear. The assessment of the quality of written communication is included in 4. 3 of 13

1 Total for this question: 10 marks 1 Analyse the reasons why Candy converted her business into a private limited company, rather than remaining as a sole trader. [10 marks] Level Descriptor 4 3 2 1 Analyses reason(s) for operating Candy's business as a private limited company. (Analysis will consider how operating as a private limited company overcomes the weaknesses of being a sole trader). Explains reason(s) for Candy to operate her business as a private limited company or drawbacks of remaining as a sole trader. (Award 7 8 marks for second explanation). Describes generic benefit(s) of operating as a private limited company or drawbacks of being a sole trader. Displays relevant knowledge of private limited companies/sole traders. Marks 10 9 AO3 8 5 AO2 4 3 2 1 AO1 Knowledge (AO1) Application (AO2) Analysis (AO3) Shareholders in a private limited company benefit from limited liability (L1). Forming a company creates a business which is a separate legal entity from its owners protecting their possessions (L2). Sole traders often struggle to raise capital (L1). They have limited resources and banks can be unwilling to make loans (L2). Sole traders can find it difficult to manage a business (L1). They may lack the skills necessary to make effective decisions (L2). By remaining as a sole trader when she expands her business Candy is putting her personal possessions under threat and she thinks the expansion project is risky. Operating as a private limited company means that she can only lose the money she has invested into the business and not, for example, her home, valued at 750 000. Candy is planning a major expansion requiring capital of 900 000 - as a sole trader she might face difficulties raising this capital. Candy is not managing her business well - in particular her control of finance is poor, causing worsening cash flow problems. As a sole trader, Candy is exposed to financial risk from her business. This increases with the expansion and her home is under threat if the business fails. By creating a private company, Candy separates her business activities from her personal possessions and reduces the risk of her planned expansion. OR Candy is already struggling to manage her business and it has only grown a little in comparison to what might occur. As a sole trader it is doubtful whether she would cope with the extra managerial duties associated with the expansion. Selling shares to people with suitable managerial skills and experience would be a major advantage to her as the demands on her time are set to increase. 4 of 13

Marker's note: The analysis column provides two examples only of how students may argue that becoming a private limited company overcomes the drawbacks of operating as a sole trader. You should reward any relevant arguments. 2 Total for this question: 21 marks 2 (a) Use Item A and Figure 1 to fill in the shaded spaces in the table below to recalculate Candy's cash flow forecast for November to January by including a revised figure for the purchase of raw materials. [5 marks] November January Marks Cash sales 3 990 Credit sales 58 945 Total cash inflow 62 935 Purchase of raw materials 107 100 2 marks Interest and bank charges 1 745 Wages 7 575 Other costs, eg marketing, insurance, transport 6 540 Total cash outflow 122 960 1 mark Net cash flow (60 025) 1 mark Opening balance 182 Closing balance (59 843) 1 mark NB: OFR for final three calculations. Award one mark for the purchase of raw materials figure if it is: - Higher than 102,000-5,100-96,900 Watch for 50,400 as a purchase of raw materials figure using previous quarter. 5 of 13

2 (b) Explain how using business software might reduce Bonbon Ltd's banking costs. [6 marks] Level Descriptor Marks Uses Item A to explain why Candy should use business 3 6 5 AO2 software to reduce the business's (banking) costs. Describes in generic terms how using business software 2 4 3 might reduce (banking) costs. AO1 1 Demonstrates knowledge of business software. 2 1 Knowledge (AO1) Business software includes databases, spreadsheets and accountancy packages such as Sage (L1). It can save time correcting errors (L1). Using business software, such as databases and spreadsheets, can allow managers to easily and accurately update information, saving time and reducing costs (L2). Software, such as databases, can help managers to identify late payers and chase up payments on time (L2). Application (AO2) Candy has difficulty keeping track of the customers who owe money and the amount outstanding. Business software could record this and could send out reminders automatically (or identify the debtors to help her to chase them up). This would reduce the business's costs as it would lower her overdraft and reduce her interest charges. Using business software to automatically update cash flow forecasts after changes in costs (as happened recently) would help her to manage her cash flow more effectively. This could help to reduce the possibility of Bonbon Ltd paying bank charges for exceeding its overdraft limit. NB: In levels 2 and 3 award full marks if explanation refers to banking costs. 6 of 13

2 (c) Do you think that an increased overdraft is the best solution to Bonbon Ltd s cash flow difficulties? Use Item A to justify your answer. [10 marks] Level Descriptor Marks 3 2 1 Uses Item A to offer analysis to show how selected method would help to overcome cash flow problems. Uses Item A to explain the consequences of using overdrafts or other methods as a solution for cash flow problems. Demonstrates relevant knowledge of overdrafts or other solutions to cash flow problems. 6 5 AO3 4 3 AO2 2 1 AO1 Knowledge (AO1) Application (AO2) Analysis (AO3) An overdraft allows an account holder to spend more than there is in a bank account up to an agreed limit. Overdrafts are flexible short-term loans, but can be expensive. Trade credit is designed to allow customers time to settle a debt to a supplier. It is normally between 30 and 90 days. It is, in effect, an interest-free loan to suppliers. Candy could manage her customers (debtors) better. She could compile a list of outstanding debts and ensure that they are paid on time. Candy could arrange a larger overdraft quickly as she has a good relationship with the bank. Having an overdraft allows her to give generous trade credit and to attract new customers. Having a larger business is important to Candy. Bonbon Ltd offers its customers generous trade credit at 90 days. It could reduce this period which would help to improve its cash flow position. This method of improving cash flow would not cost the company any money. Candy is not chasing up the businesses that owe her money. As a result, she has less cash than she needs and is forced to borrow from the bank. Making sure customers pay on time would help to solve the company's cash flow problems. Having a larger overdraft would avoid additional bank charges and could be an ideal solution for Bonbon Ltd as it is a flexible short-term loan. This would be suitable to enable her to sell at peak periods in the summer and at Christmas without worrying about cash flow. She does not need funds at other times of the year so it is not necessary to pay for a permanent loan. Offering 90 days' trade credit is generous when the company's sales are rising quickly (too quickly at times) anyway. Reducing this to 60 or 30 days would lead to earlier inflows of cash avoiding the need to pay for an overdraft. This is a cost-effective solution to her cash flow problems. Candy is poor at managing her company's finances, especially its cash flow. Getting customers to pay on time (they already have generous trade credit terms) would help to resolve her cash flow problems through earlier cash inflows without having to make her business less attractive to customers by reducing trade credit when she wants to expand the business. 7 of 13

In addition, use the grid below to award marks for AO4 evaluation and quality of communication. For AO4, you should award marks using the scheme below. The judgement for this question is whether or not an increased overdraft is the best solution for Bonbon Ltd's cash flow difficulties. Award E2 when students draw on information from the case and use this effectively to support their decision. Level Descriptor Marks E2 Offers judgement which is supported well in context. 4 3 E1 Offers limited judgement. 1 mark for assertion. 2 marks for generic support. 2 1 AO4 Points for evaluation might include the following: using an increased overdraft will provide a quick and straightforward solution. Its cost should not be a problem as the company is very profitable. In the longer term, she could explore other, less costly solutions an overdraft is entirely the wrong solution. She should look to overcome the cause of the problem, not to mask it through borrowing. Her decision to offer 90 days' trade credit is far too generous in the circumstances and should be withdrawn immediately the underlying problem is her poor management of cash. She could improve this by chasing up late payers effectively and reducing trade credit. If she reduces trade credit to, 30 days for example, her business will still be attractive to customers, but she will have more control over cash flow. Note: AO4 also assesses students quality of written communication. When deciding on the AO4 level to be awarded, consider the degree to which the student orders and communicates his/her ideas. 8 of 13

3 Total for this question: 13 marks 3 (a) Assuming that Bonbon Ltd buys the school buildings, use the information in Item B and Figure 2 to calculate Bonbon Ltd's forecast profits for 2018. [5 marks] Correct answer: 78 000 [5 marks] Revenue for chocolates = 195 000(1) x 4 = 780 000(1) [2 marks] Total revenue = 780 000 + 12 500 + 137 500 = 930 000 [1 mark] Total costs = 625 000 + 48 000 + 59 000 + 120 000 = 852 000 [1 mark] Profit = Total revenue total costs = 930 000-852 000 = 78 000 [1 mark] NB: OFR applies for the figures for total revenue and profits. NB: 1 mark for relevant formula in absence of valid calculations. 9 of 13

3 (b) Use Item B to analyse why Candy sold shares rather than taking out a bank loan to buy the school buildings. [8 marks] Level Descriptor Marks 3 Uses item B to analyse the advantages of using share capital in comparison to a bank loan. 8 7 AO3 2 Uses item B to explain advantages to Bonbon Ltd of using share capital and/or disadvantages of the use of a bank loan. 6 4 AO2 [Award six marks if both elements covered]. 1 Demonstrates knowledge of relevant sources of finance. 3 1 AO1 Knowledge (AO1) Application (AO2) Analysis (AO3) A bank loan could be expensive Using a bank loan for the company as the rate of may be an expensive interest will be 8.5%. Interest source of finance. rates are forecast to rise in the Using this source of future which could increase costs, finance could reduce further damaging the company's the company's profits, which are not forecast to profits. be very high in 2018. Selling shares avoids the need to make fixed interest payments. Dividends may only be paid if sufficient profits are generated. Bank loans can weaken a business's cash flow position. In contrast, sources, such as share capital, do not commit businesses to regular interest payments. Selling shares provides the capital required without committing the company to further expenditure at a time when its profits are forecast to be low, and may take time to increase. A bank loan means that Bonbon Ltd will have to make regular interest payments. The yearly interest on a loan would be high (around 42 500 at 8.5%). This would cause further cash outflows and the company has not managed its cash flow well in the past. Issuing shares means that the company can preserve cash as it is not making dividend payments. This will help the company to control its cash imbalances - which were high before the expansion. The use of a bank loan with interest payments at 8.5% (which could rise further) is unlikely to help Bonbon Ltd to increase its profits. This is an expensive source of finance when Candy has 500 000 available which is currently only earning 1.75%. She can use this to buy shares to fund the expansion. Giving up this low rate to avoid paying a much higher one will help the company to be more profitable in the future and will result in her receiving a higher share of the profits. Candy plans to sell shares worth 900 000 to provide all the capital needed to purchase and convert the school buildings. The company will only have to pay dividends on these shares if it makes sufficient profits, while a bank loan would commit it to regular monthly interest payments. Selling shares will help Bonbon Ltd to manage its cash flow more effectively and to continue to offer attractive trade credit terms - important if it wants to expand. 10 of 13

Raising finance through the use of bank loans can result in the bank or others having some control over a business. The sale of shares means that whoever has the majority of shares controls the company. If Candy had sold shares to her cousin valued at 400 000 and arranged a bank loan for the remainder of the capital needed, she would have lost control of the business. She would only have controlled 90 000 of the company's shares - about 9%. The decision by Candy and her cousin to buy the shares between them means that Candy will hold sufficient shares to retain control of the business. She will have 59% of the shares. By selling shares for the entire amount of the investment, and not taking out a bank loan, Candy retained control of her business. She holds shares valued at 590 000 to her cousin's 410 000. Thus she has 59% of the shares and is able to make the major decisions such as continuing to expand the business and fulfilling her aim of managing a successful business. It also allows her to ensure that she meets other aims that are important to her such as creating employment for local people. NB: In levels 1 and 2 award a maximum of 2 marks (1+1) for a description/explanation of any relevant source of finance. 11 of 13

4 Total for this question: 16 marks 4 Using all of the information available to you, analyse the case for and against Bonbon Ltd buying and converting the school buildings. Advise the company whether or not to go ahead with this purchase and justify your decision. [16 marks] Level Descriptor Marks 5 Uses case study to analyse arguments for and against the purchase of the buildings. 10 9 4 Uses case study to analyse arguments for or against the purchase of the buildings. 8 7 3 Uses the case study to explain reasons for and against the purchase of the buildings. 6 5 2 Uses the case study to explain reasons for or against the purchase of the buildings. 4 3 1 Offers relevant descriptive points. 2 1 AO3 AO1/2 Knowledge (AO1) Application (AO2) Analysis (AO3) Buying the school buildings may not be a good idea as it may lead to further cash flow difficulties or fail to increase profits sufficiently. The profits forecast in Figure 2 do not show an enormous rise following a very big expansion and the investment of around 900 000. Candy may earn more profits by keeping her savings safely in the bank and just expanding the company using her outbuildings. Bonbon Ltd has had cash flow problems, especially at certain times of the year. Buying the school buildings will increase outflows and may not generate enough inflows at times creating larger cash flow difficulties. The company has some financial issues to resolve before expansion, eg seasonal cash flow problems. Candy needs to reach a decision on how to improve her cash flow position and to manage her finances better before a major expansion. The financial rewards for a major investment of 900 000, which is risky, are not enormous. Bonbon Ltd's sales are three times higher than previously, but profits have only risen by 50%. (Profit margin has fallen from 16.77% to 8.39%). This will not help her to achieve her ambition of managing a profitable business. This is a forecast and the strength of the competition in this industry means that this return cannot be relied upon. Many of the company's cash flow problems remain before this expansion. Candy has ongoing issues relating to the seasonality and most of these will remain as the majority of the expanded business is based on the sale of chocolate products. Unless she resolves this, the expanded business will have much larger cash flow difficulties and the bank may be less supportive as the company is not so profitable. The company should at least delay the decision to expand. 12 of 13

Buying the school buildings could be a way of making the business more financially successful in the longer term. The business's sales are forecast to treble following the expansion and this is just in the first year and it is a cautious forecast. The sales figures could be expected to be higher in future years and this allows Candy to have the larger business that she wanted. The business is growing and is spending heavily on marketing - if this spending is lower in future years, and sales grow, profits may increase. The company's financial performance has potential. It has cash flow difficulties mainly of its own making and these can be resolved. Although profits are not high, this is because it is in the process of winning more customers and is spending heavily on marketing - production can increase by 500%. If this was at its 'normal' level, profits would be 158 000 (a profit margin of 16.99%). This looks very attractive (and especially for a 'cautious' forecast) and could be expected to increase further in the future. In addition, use the grid below to award marks for AO4 evaluation and quality of communication. For AO4, you should award marks using the scheme below. The issue for evaluation in this question is whether or not to buy the former village school. Level Descriptor Marks E3 E2 E1 Offers developed judgement which is supported well and considers both sides of the argument. Judgement is based firmly on the context in the case study. Offers developed judgement which has some support from the case and makes a decision on whether or not to buy the former village school. Offers limited judgement - this is an assertion or a judgement with generic support. 6 5 4 3 2-1 AO4 Relevant points for evaluation may include the following: the company should go ahead and purchase the village school. The profits are not highly attractive for the first year, but there are reasons for this. The financial case is really strong - it has the capital and has not had to borrow. It makes a profit and will reduce the extent of the seasonality of its cash inflows. Once established, this will be profitable (assuming the forecasts are correct) and will enable Candy to fulfil her ambitions of creating employment and managing a growing business this is a very risky decision. Candy recognises this and, if it fails, she will lose the business, her savings and the chance of providing jobs locally. It involves investing a large sum of money and competing in a market which is very competitive and made more so by the growing use of the internet - she is not just competing against local rivals. A smaller expansion, based on her existing outbuilding, and risking a smaller amount of capital, would be more prudent much of the decision must depend upon the accuracy of the accountant's forecasts. They are presented as cautious, but it would be difficult to assess what other producers might do and whether new businesses might be established, for example by using the internet. If Bonbon Ltd is confident in the forecast sales figures, then it should go ahead. However, it does represent a large risk. Note: AO4 also assesses students quality of written communication. When deciding on the AO4 level to be awarded, consider the degree to which the student orders and communicates his/her ideas. 13 of 13