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Sue is a sole trader whose business is growing rapidly as sales are increasing - HSC - SSCE Business Studies - Question 21 - 2016 - Paper 1
Question 21
Sue is a sole trader whose business is growing rapidly as sales are increasing. As a result of the growth, she needs to purchase stock worth $10,000. (a) Explain a ... show full transcript
Worked Solution & Example Answer:Sue is a sole trader whose business is growing rapidly as sales are increasing - HSC - SSCE Business Studies - Question 21 - 2016 - Paper 1
Step 1
Explain a potential conflict between a short-term and a long-term financial objective for Sue.
Answer
Sue aims for long-term higher profits through increased sales. In the short term, this requires her to purchase stock, which may reduce her liquidity. The immediate financial objective of maintaining liquidity can conflict with her long-term goal of higher sales and profits. This situation can lead to financial strain if she does not have the cash flow to meet other immediate operational costs.
Step 2
Discuss ONE internal and ONE external source of finance for Sue’s purchase of stock.
Answer
For internal financing, Sue can consider using retained profits, which provide her with a cost-free source of funds. This option is practical if she has sufficient profits accumulated, allowing her to avoid additional debt.
For an external source, Sue might explore a bank loan. This option would allow her to immediately acquire the necessary funds to purchase stock, although it may involve interest payments and the obligation to repay the loan, impacting her cash flow.
In summary, using retained profits helps maintain financial independence, while a bank loan offers ready access to capital but comes with financial commitments.